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If you find yourself perplexed by the current state of the wheat market, you are not alone. The most widely traded wheat class, US SRW, is also arguably in the most bullish of positions. US supplies are at 25% stocks to use, the lowest in ten years. Ex-ports are up 22% from a year ago, yet CBOT is continually sold off (as per Todd Hult-man - DTN).

It is an interesting dichotomy, the contrast between stocks to use and the sharp losses we are witnessing in wheat. Corn and beans have their own bearish story contributing to the drag.  Major exporter wheat Stocks to use numbers on paper should indicate a degree of support, with the IGC and USDA recently reporting wheat stocks at an 8-year low.

 

Today’s reality is, that where wheat is plentiful corresponds (geographically) to the most dense areas of demand. The Black Sea neatly channels out to the Mediterranean and straight into the Middle East and North African nations. The area also lends itself to direct transport through the Suez Canal (via the Red Sea) to the consumer-dense SE Asian countries. A cheaper freight leg only compounds the issues being experienced by other exporters.

 

Russian wheat last traded somewhere close to US $200/t FOB down $8/t on the week. The race for the bottom is ensuring that Russian origin is very high on the tender list. French, Romanian and Ukrainian origins are also competing at very low prices to try and win business. The rightful question is, can this be sustainable? Especially when reports are suggesting that wheat and corn prices are now below the cost of production in some countries. Russian exports are expected to reach a record 51mmt this year, leaving a sizeable carryout of 12mmt, even before the new season crop, estimated at a very healthy 92mmt, comes online.

 

It will be interesting to watch what happens here. The low price of wheat may stimulate some additional buying. Or does it turn acres away? Either way, it should lend support to wheat prices in the long term. The elephant in the room will remain the competitiveness of Russian wheat relative to the rest of the world.

The week ahead….

Another USDA report is due next week. Market participants will be watching corn sowing progress and conditions in Brazil as well as US stocks. China cancelled 130,000mt of US SRW last night but may be in for another bite now that prices have fallen.

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Data sources: AWEX, Mecardo

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