Another week and another round of market volatility. To be fair, volatility doesn’t always mean the market moves sharply up and down, but it is relative to the long-term price action for a particular time of year. Traditionally, as the Northern Hemisphere sleeps through their winter, the wheat market also tends to tread water, waiting for the Spring action.

This year is different though.  Wheat is an active follower of corn and beans this year, and both of these commodities are surging on tightening supplies and huge demand.  The South American bean harvest is slow to get started due to recent rain.  There is a virtual flotilla of bulk carriers waiting to be loaded out of Brazil, but weather waits for no man.  The crop is there, but questions around quality and pod losses will keep the bean market supported.

Market analysts are also trimming South American corn prospects on the back of planting delays.  The cuts, while likely to be relatively small, nonetheless are adding support to corn prices as the US experiences a steady tightening of their own supplies.  It is a long time before corn harvest, and it appears inevitable that some kind of demand rationing will need to occur. 

It makes for an interesting dynamic come April/May when the US farmer decides what to plant.  I suspect the fight for acres will add another element of volatility to an already turbulent market.

Throwing the virtual spanner in the works, is the Russian Gov’t export tax intervention aimed to lower the domestic price of food and feed.  The initial response to the tax (which comes into effect 15th Feb) was a very confused Russian exporter, but also the assumption that demand would spontaneously flow to the US.  The result has seen wheat prices rally, totally at odds to what President Putin was trying to achieve.  The incremental increase of said export taxes due to come into effect 15th March, exacerbated this. 

Now the Russian Gov’t has formulated a floating tax due to come in 1st June.  This has added another element of confusion to global wheat markets. The floating tax will be at 70% of the price remaining after $200/t of the export price.  For corn and barley, it will be set at $185/t.  This is a huge deal and will certainly cap Russian cash values, and likely global values.  This in effect also means the Russian farmer will have no choice but to keep selling their grain and will have very little benefit from holding. 

Clearly President Putin is not a fan of the Russian farmers newfound taste of capitalism.  The spirit of Glasnost is fading and this new level of Gov’t regulation couldn’t come at a worse time for the new wheat superpower.

Next week

Short term, the wheat market will remain supported by Chinese demand and production uncertainty in South America.  I would expect that once the Russian farmer accepts their fate, and begins to sell again, we will see some weakness creep in to the wheat market.  Beware the new season inverse as buyers will be licking their lips at the prospect of cheaper commodities.  

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Data sources: CRM Agri, Dartboard Commodities, Mecardo. 

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