It has been a theme on high rotation. The one where market analysts say the market can’t go down forever. The one where analysts point to the huge, short/sold position in wheat and shake their collective heads at the quirks of the market. As the unhealthy size of the short position became unwieldy, all it needed was a spark. Has that spark just happened?

For the past month, Moscow has been threatening to walk away from the Grain Initiative. Their ‘unofficial’ deadline is the 18th of May, whereas the UN and Ukraine have the agreement stretching for another couple of months. The alleged drone strikes of this week have further added fuel to a fire that needs no stoking. 


The wheat market reacted initially with a limit-up move, bouncing off 21-month lows. The question will be if this lights a fuse on the long-awaited ‘short covering rally’ or if the market experiencing some kind of war-related fatigue.  The UN is scheduled to meet in Moscow on the 5th of May to try and renegotiate terms. Until then, we suspect the market will be walking on eggshells.


Should the market cover the roughly 130K sold contracts, the holders of those positions will be hoping for an orderly exit.  Short-covering rallies can be quite explosive if everyone rushes for the door. While they may be explosive, they are also historically short-lived.  Even if the market does rally, it has some ground to make up.  The recent weakness in wheat has been driven by a number of factors. 


Firstly, Russia and Ukraine have been shipping wheat through the Black Sea at breakneck speed.  Russian exports for April tallied 3.8mmt, a record for this time of year.  The ‘floor’ they introduced of US$275 Free on Board (FOB) has been breached by some recent sales which has seen FOB values across the globe fall as other origins try to compete.  Secondly, Brazil has been exporting corn at very cheap prices, which has undermined the feed complex including ASW wheat and feed barley. Lastly, crude oil has fallen below US$70/barrel in the past week.  The underlying signal this sends to the commodity sector is that global economies are struggling and creating a ‘risk off’ mentality.

Next week

It remains a tough market to navigate.  The Grain Corridor is even chances of collapsing if the Russians can’t squeeze some concessions out of the UN. Should some middle ground be made, and the Corridor continued, expect recent strength to dissipate quickly.

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Data sources: Refinitiv, Reuters, USDA, Mecardo

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