Stop the roller coaster – I want to get off


The slump in wheat prices over the past two weeks has been something out of the box. Since the resumption of the Black Sea Grain Initiative, the technical traders have significantly increased their bearish bets by increasing their short (sold) positions in wheat. The news of unimpeded Russian exports and a monster Australian crop has pulled the rug out from underneath CBOT wheat contracts as the market tries to find parity with the cheap and plentiful Black Sea supplies.

Recent developments in the market have been a welcome reprieve for the end users who have been filling their boats with this relatively cheap wheat; having stared down the barrel of food shortages only a few months ago.

The market remains challenging to navigate; This season we have seen highs well outside of ‘normal’ ranges, and have also tested lows, again outside of ‘normal’. In the past fortnight wheat has dropped 11% and is now testing 14 month lows.  The obvious catalyst for this volatility is the conflict in Ukraine, but we are also seeing double digit inflation across the globe, tight stocks in exporting nations; and uncertain demand.

Tonight, the USDA will release their WASDE (World Ag S&D Estimates) report.  Other than routine business, the US is dragging the export chain, which is expected to result in slightly larger carryout figures.  Globally, a record Russian and Australian crop is also expected to provide some relief for tight wheat inventories.

Closer to home, harvest is Australia is unveiling a huge crop and despite predictions of doom, particularly in the flood ravaged East Coast, quality is holding up better than expected.  The latest ABARES outlook predicts that record breaking crops will be harvested in WA, SA and QLD; and is tipping national wheat production to reach 36.6mmt, breaking last years record of 36.3mmt.  There is still a fair bit of conjecture over exactly how big the NSW and Vic crops will be.  Some analysts are making an argument for 40mmt which would set a new benchmark high.

Whether it has been harvest pressure, or the coincidence of falling global prices, our cash prices have been under considerable pressure.  The recent move puts US SRW wheat within competitive ranges although it is questionable if they pick up demand with Russian and Aussie wheat hitting the pipeline.  Unless the exporter wants to give up some of their elevation margin, it’s hard to see why prices will rise without a significant shift in global prices.

Next week

 In a technical sense, the wheat market looks oversold.  Whether this will be enough for wheat to rally from here will depend on demand, and whether the technical trader is looking to square up short positions ahead of the Christmas break.

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Click on graph to expand

Click on graph to expand

Data sources: Refinitiv, Profarmer, CBOT

Photo Credit: Zoe Schiller- ” Two Cruisers”

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