The market has tried a number of times to rally on news that the Australian and Argentinean crop is suffering from dry conditions.

One side of the market is pointing at the fact that global stocks to use (excl China) are at a pretty dismal 13% and major exporters are the ones facing the shortfall. The other side of the market is saying Russian wheat will fill all the gaps. It is a case of short-term supply surplus riding roughshod over the looming squeeze in available stocks.

It feels like the market will one day have to rally off these multi-year lows, but as I’ve discussed on here before, the fact it ‘should’ doesn’t mean it ‘will’.

Russia remains a major protagonist in the wheat market. The Ministry of Agriculture is trying to set higher floor prices, but importers are currently able to buy cheaper Russian origins through private sellers. It makes for a very confusing market-place. At the same time, Russia continues to target Ukrainian ports on the Black Sea further complicating wheat trades.

Ukrainian exports for August are down 51% year on year, highlighting the impact of the conflict. The fact that two vessels recently ran the gauntlet successfully does not immediately address hopes of a new ‘grain corridor’. I suspect it simply brings the ports in Odessa and Chornomorsk into the spotlight.

Southern Hemisphere production will soon dominate market wires. Argentina’s wheat belt has seen well below average rain for the past 30 days, except for the bullseye over arguably the region’s most dense wheat area of Cordoba. Much of the Buenos Aires region which accounts for 42% of the country’s wheat production has seen only 40-60% of average rainfall. There is still time to arrest any slide, but with crops around early tillering, any rain would want to be soon.

Lastly, all eyes will be on the rain event forecast for the East Coast of Australia. To say this would be a ‘million dollar’ rain would be an understatement. Dry conditions had been marching south through NSW and estimates were starting to be revised lower. A rain of 25-35mm would certainly shore up yields and help to stabilise Australian wheat production in the 23-25mmt range.

Next week

A rain in Australia will help to erase any questions over the exportable surplus. On the balance of probabilities, expect CBOT to weaken as risk is removed.

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Click on graph to expand

Click on graph to expand

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

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