Oversold and unloved – is it wheat’s time to shine?

Field of green and gold wheat

Global grain markets have been attempting to stabilise this week after a month of being sold off. Wheat was entering an ‘oversold’ position and was due for a correction of sorts. The situation that caused the sell-off; a large Russian crop coupled with growing export pace and a bumper Aussie crop; is now largely yesterday’s news. The retraction in wheat prices, while having some fundamental basis, was largely technically driven. The premium that wheat now commands over corn, is now only 11% and the lowest since 2013 (Sizov. A, SovEcon). Does wheat rally to correct this anomaly or does corn lose its shine relative to wheat?

The question mark hovering over corn and beans due to the drought in Argentina seems to have disappeared for the time being.  Good rain has fallen in key agricultural regions in the past week with follow-ups promised for the next week.  This will allow any late seeding to be completed and restore some confidence in this season’s crop. Crop conditions have improved week on week with the good/excellent rating increasing 6%.

 

Of course, it is never as simple as one commodity rising or falling against another.  For a couple of months now, wheat has been used as the short leg (a hedge against bullish corn and soybean prices) by technical traders.  Net wheat open positions stand at roughly 65k contracts short (sold).  If those shorts were to try to exit quickly on a supply disruption or a production problem, we could see a phenomenon called a short squeeze. This can see futures rally hard as all these contracts are ‘bought’ back to reduce exposure.

 

While the market seems to have completely disregarded the ongoing war in Ukraine, it remains a flash point.  Russian advances on the Eastern Front, coupled with the West promising to send tanks and other military hardware, promises to keep tensions near boiling point.  Ukraine has recently stated that its 2023-2024 wheat crop will not exceed more than 16Mmt due to the ongoing effects of the war.  This is a far cry from the 30Mmt produced in friendlier times.  Russia should have a large stockpile of wheat left over which should act as a buffer for new-season wheat prices.  Recent comments from the Kremlin suggesting that exports should be monitored have also sparked some concerns that Russia may reintroduce export controls.

 

For now, grain exports out of the Black Sea are impressive and will arguably set the tone for wheat prices.  Geopolitically, the area is not without risk.  Consumers appear to be content to take that risk if it means they can access cheap grain.

Next week

A weak US dollar is making US wheat more attractive on the global stage. While it is eroding Australian cash returns, any extra demand for US wheat will tighten inventories and will hopefully keep a flame under global Free on board (FOB) values. 

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Data sources: SovEcon, Reuters, Dartboard Commodities, Mecardo

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