CBOT wheat futures are still in a short term upward trend, but late last week the market failed to capitalise on an attempt to break out of a longer term downward price trend, in place since 2012.
A weather scare in the US pushed wheat futures higher, which in turn triggered a round of buying from funds, as they liquidated short (sold) positions. When the buying dried up on Thursday night, after a short, sharp rally, prices fell sharply. A 10 USc/bu rally from the previous close quickly turned into a 17 USc/bu fall into the close of the session, leaving futures prices down 5.5 USc/bu from the previous close.
Losses were extended on Friday night, to leave March futures down 23.25 USc/bu from the intraday high on Thursday night.
Support for US wheat prices has come from a couple of directions. One immediate impact has been from well above average February temperatures across a part of the US winter wheat belt. It is too early for such high temperatures, opening up the risk of significant damage if another cold snap moves across the mid west.
The drought monitor is also showing regions of dryness, which is not really an issue this early in the season, but does raise a warning flag to add to any other weather concerns.
Other supportive data has come from US export sales numbers. They don’t appear to be too bad in the last couple of weeks, but the underlying issue is that actual shipments are not that strong. In fact, some are suggesting that the pace of shipments does not support the lift to US exports that was factored into the February USDA Report.
The real support for the lift in prices last week came from fund buying. This has been a sleeper for some time, with a very large net short (sold) position being held by funds, with buying to close out positions pushing the market higher than it should naturally go.
The end result of that has been to, once again, leave US wheat prices at uncompetitive levels in world markets, with the latest Egyptian purchase once again going to Russia, Ukraine and Romania, despite US wheat also being offered.
The expectation now is that US wheat futures will ease until US wheat prices become competitive once again. This has been a pattern for some time now after prices get pushed too high on speculative buying.
However, the market is vulnerable to weather issues this year, with uncertainty in the US as well as the Black Sea region. As a generalisation, wheat supplies are not seen as being a problem, but with a reduced acreage planted in the US, and a return to more normal yields elsewhere, the market will be poised for a drop in global output this year.
The other point to watch over the next few months will be the pace of exports from Russia. They still need to move more of their big crop from last year. If they don’t, it will add to the carryover into the new season wheat supply.
We almost need to take the pain on wheat prices in the short term, to reduce the impact of Russian wheat sales in the second half of the year. The global wheat market needs to be more balanced if we are to see wheat prices return to more sustainable levels for our 2017 crop.
