Wheat head closeup in a field

The rot has well and truly set in for the wheat market. Since the seasonal highs were hit at the end of May, the CBOT Dec contract has lost 80c/bu - or roughly AUD$40/t. The finger is being pointed at an early start to the harvest in the Northern Hemisphere and news that Turkey was to ‘ban’ wheat imports.

Turkey is the world’s 5th largest wheat buyer, so the headline was enough to whip up a selling frenzy. However, history would show that Turkey routinely limits imports to prop up domestic prices. The fine print also states that the import ban has a short shelf life, due to end on the 15 October.

 

There seems to be a fair bit of head-scratching about the speed and scope of the decline in wheat prices. Two weeks ago, the market tone had changed to be quite bullish, and the open interest (net position of futures and options) had gone from a heavily sold position to being weakly bought. So, what happened?

 

While not definitive, I suspect that the recent tenders (Egypt and Algeria) uncovered the fact that there were a lot of cheap, old crop still available. Coupled with this, is that harvest is rapidly expanding, with Ukraine starting two weeks earlier than normal due to dry weather and the United States Hard Red Winter harvest is already 12% complete.

 

Many bullish factors are competing for attention, including…

       Current Global stocks to use 13.5% – historically tight.

       USDA tipped 24/25 production to be 7.5mmt lower yoy due to smaller crops in Russia, Ukraine and EU27.

       A Potential increase in Indian trade.

       China stating that it will increase state reserves citing the potential of lower global stocks.

 

However, the bears will not be ignored. Despite EU27’s below-par season, when you couple their carryover stocks, the European bloc will remain a strong competitor. Russia too is sitting on sizeable carry-over stocks which will come into play in this season’s export program. The USDA this week cut the Russia export total from 52mmt to 48mmt on the back of declining production, which is only marginally behind this season’s tally of 51mmt. The most recent GASC tender showed that Russian wheat was uncompetitive but there was a lot of French, Romanian and Bulgarian origin at cheaper prices being offered.

 

There is a lot of weather that still must play out. In the short term, late rains in Russia are not going to help the winter wheat crops.  A relatively dry week in France has seen crop conditions improve to 62% good to excellent, still a long way away from the 88% good-excellent observed last year. Does La Niña arrive in time to jeopardise crops in Argentina and the US? Or come in time to benefit Aussie crops?

Next week

There is a lot of conflicting news making the rounds in the markets at the moment. Wheat prices will take the lead from nearby demand, but the fact that the Black Sea remains highly competitive for both old and new crop will create some headwinds. Short term, I suspect that prices will drift lower from here, but longer term, should find support.

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Click on graph to expand

Click on graph to expand

Data sources: SovEcon, USDA, Reuters, Next Level Grain Marketing, Mecardo

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