Wheat field Australia

Funny fact that as soon as you call the market in one direction, it can and usually does, the opposite. I’ll own it - last week I stated that I thought it would be difficult for wheat to rally, based on cheap Black Sea grain, Aussie harvest pressure, slack Chinese demand. This week I’m not so sure. The question is, will we see the market in full reversal mode or will it peter out in the absence of fresh bullish news.

This weeks catalyst for the wheat market rally has been over fears of freeze damage in the US.  A series of storms is due to hit combining with a frigid pool of very cold Arctic air.  The mixture of rain, sleet, snow and ice is forecast to be a huge dump of moisture across the Canadian and US territories.  While the moisture will be welcome, the cold ‘could’ be detrimental in winter wheat areas without adequate snow cover.  So the question will be what comes first, the snow or the freeze?  While the US HRW crop is generally considered to be in very poor condition, I can’t help thinking that this storm will do more good than harm.  Remember, the market likes to ‘kill’ the crop a couple of times throughout its life cycle.

A much better than expected week of US export business also added impetus to the rally.  The US has been struggling to attract anything other than routine business due to high wheat prices and an unfavourable exchange rate.  The recent fall in wheat prices brought US wheat back into reach and a series of import tenders resulted in a good week.  In fact all major ag commodities had a good week, including soybeans which were helped by a 1.3mmt sale into China. China has been favouring Brazilian origins, so a return to the US is a welcome sign for prices.

Fundamentally, wheat should be supported.  Despite a slight relaxing of major exporter stocks, the stocks to use numbers are still historically tight.  European export pace (particularly French) has been through the roof and they are at risk of having to ration demand.  If China re-emerges from their COVID lockdowns with a renewed appetite, it could change the whole market.

The one factor that no-one has a really good handle on, is the actions of the algorithm or technical traders. The wheat market is heavily weighted to the sold (short) side with a relatively thin number of participants.  Should sentiment change and they all rush for the door, it could make for a very volatile period.  Stay on your toes!

Next week

It feels like the wheat market has turned a corner.  The sell off has eased and we are possibly in an over sold corrective phase.  Personally I favour a levelling of prices rather than a prolonged rally.  Given my recent form, that is probably the kiss of death.  Merry Christmas.

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Sources: Reuters, SovEcon, Next Level Grain

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