Wheat futures have taken on a bearish tone over the last week or so, with the A$ value of nearby futures dropping close to A$200 per tonne.
This is a bit of a line in the sand for international wheat prices. The market does not trade for very long below this benchmark price, and has not been below this level since early December.
Last year the market spent 36 days below A$200 per tonne during August and September, and then a few more days on three occasions in late October, part of November and a few days in December. The lows then seemed to be signalling the long term low in wheat prices.
Since 2006 wheat prices have only spent brief periods at these low levels, in September 2009, March 2010, and September 2014. When prices in our terms are this low, they are low for most wheat growers around the world, and there is a limit to how long farmers will continue to grow wheat at a loss.
That doesn’t guarantee a lift in wheat prices anytime soon. The market is the market and it will do whatever it likes. It will be taking its cue from corn and soybeans, and from production expectations for 2017.
Of course, what we really need is a crop failure in the Black Sea region. Russia and Ukraine have driven the world wheat market since 2007, and when they have big crops prices for everyone get pushed down. Likewise, we have had price rallies on the back of dry seasons, forecast dry conditions, and political activities and market interventions in the region.
At the moment the market commentaries are all suggesting that outside of the US, there are very few weather concerns of significance. In the US it has been dry, but rains are expected to come this week to relieve the situation for the near term.
Even if we do get rain in the US this week, it may not be that negative for prices because the market has already factored the rainfall event into prices. On the other hand, if the rainfall events don’t meet expectations it will provide an excuse for weather premiums to build back into prices.
The best hope for wheat prices for 2017 remains the sheer cheapness of wheat. Despite big stocks hanging over the market, it will contribute to a price recovery if we get any production issues by the middle of the year.
Without that we would expect another year of low wheat prices, but it remains unlikely that US futures will trade below A$200 per tonne for extended periods.
The best bet scenario for wheat is that we will see a sharp price rally at some stage in the next 18 months. The trigger will be declining world output against low prices, coupled with a production issue that adds to a decline in global output.
There is still time for that to happen this year, but if it doesn’t it will intensify the chances of it happening in 2018, as more acres get pulled out of production globally.
One outcome for 2017 is that opportunities to make forward sales may be limited. Without a weather induced price rally this side of August, it may just be one of those years to stand aside from sales.
