It’s amazing how quickly sentiment can turn around. With last weeks’ signing of the Black Sea grain initiative (grain corridor) for another 120 days, the wheat market feels like it has turned a corner.

Market analysts are increasing their forecasts of Russian export volumes, and buyers are turning back to Ukrainian origins now the grain corridor has some more certainty. In addition, the US is so far away from export prices as to be completely uncompetitive.  Southern Hemisphere production is firming up and despite a drought ravaged Argentinian crop, and quality concerns around the Australian crop, there does not appear to be too many concerns around supply.

If you are looking for further consensus on the tone of the market, speculative trades increased their short (sold) positions in wheat and corn to now sit at the largest short position since the start of the war. As a reminder, a short/sold position is effectively a wager that the market will weaken from this point (meaning that the owner of the position will make money if the market falls).

Of course there remain risks –  mainly around economic conditions and geopolitics in the Black Sea.  However, the Northern Hemisphere winter crop (with the exception of the US) is in good condition after some pretty good rains as it heads into dormancy.  Modern history would tell you that launching a military offensive in a European winter does not end well, so it is reasonable to think that hostilities will quieten a little over the winter period.

While harvest in Australia is in its infancy, good yields and quality out of Queensland and South Australia has given the trade some reassurance that there will be some decent milling grades among what will be another huge harvest.  Western Australian quality is mixed, with lower than average protein, being compensated by big yields.  Harvest is more progressed in the Geraldton port zone where roughly 40% of the crop received to date is achieving 10% protein.  Harvest is yet to resume in areas recently hit by rain and storms so it will be interesting to watch if quality holds up.

So what is going to make the wheat market rally?  In the short term, Geopolitics  – and I’m not sure how you trade that.  The current 120 day agreement puts the corridor renewal back out to mid March.  It is possible we see some uncertainty and risk built back into the market as we approach this deadline.  European wheat stocks have been flying out the door, with France expected to have shipped approximately 75% of its surplus by the end of December.  If the US starts to pick up non traditional demand, it might push the needle up a tick, however I feel this is the least likely outcome as Black Sea and Australian stocks should be adequate for any demand profile over the next six months.

Next week

We can expect  the wheat market to trade in a fairly narrow range from now until we move into the Northern Hemisphere spring. That’s the point where we can expect that the market will be prime to start jumping at shadows again.

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Click on graph to expand

Click on graph to expand

Data sources: Refinitiv, Profarmer, CBOT, Dartboard Commodities

Photo Credit: Lydia Walter

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