Nervousness returned to the wheat futures last week, with strong weekly gains recorded, pushing July CBOT prices to their highest levels since March. On a nearby contract basis we came within about 6 USc/bu of the highest CBOT futures prices since July last year. It won’t take much of a gain during this week to cover that gap.
A price rally forming in June is interesting. It normally means that there is a problem with one or more of the northern hemisphere crops that is likely to be significant, and less likely to be reversed because of the advanced stage of the season.
Since 1994 we have had six years with significant year on year price rallies from one November to the next. In five of those cases the rally started in May or June. In the other case the move began in July.
Most of the time that we see the market rally mid-year, the gains are held onto into the end of the year, signalling that mid-year we can sit back and watch it unfold. That also supports the view that a mid-year rally is mostly driven by factors that are hard to reverse.
Since May 31, CBOT July futures have posted a gain of 35.75 USc/bu, or 8.32 percent. The gain in A$ terms has been trimmed back to 6.15 per cent because of a 1.5 US cent lift in the value of the Australian dollar against the US dollar.
The cash market in Australia has responded with gains of around $22 per tonne for old season wheat over the same time period. These are gains of about 10pc, so a lot better than the lift in the A$ value of US futures.
The additional gain in our market represents a lift in basis. Our basis levels are being supported by the lack of rain across the country at the moment, and by the trade re-entering the market after digesting the significant purchases made at harvest and earlier in the year.
The question now is whether the fledgling rally will last, or whether it fails as it can do about 30pc of the time.
The rally is being driven by dry conditions in spring wheat areas of the US and southwest Canada, creeping dryness across the US corn belt, dry and hot conditions expanding in Europe, and dryness in Ukraine and probably a part of southern Russia, and of course our own very dry start to the season.
The caution this year is that we are starting from a position of very large wheat stocks globally and in the US. That will always temper the strength of any rally, and if we get significant rain in any of the dry areas mentioned above, it may kill off the rally, and the underlying stock levels may prevent it reforming.
That said, the sleeper is actually the tightness of wheat stocks outside China and the US. If we begin to lose more production from Canada, the EU, the Black Sea and Australia, those stock numbers will tighten sharply.
That should open the door for more exports from the US this year, and if we combine that with a further dip in US output because of drought in the spring wheat areas, it will drive US wheat stocks down much faster than current projections. US futures should reflect this as it unfolds.