The rally in CBOT wheat futures took a breather over the week ending last Friday night our time. For the week, the value of nearby July futures were down A$1.07 per tonne. Since mid June CBOT futures have lifted by A$12 per tonne, while Australian prices are up $20 per tonne.
It would now appear that 2016/17 wheat prices moved to levels lower than would be expected given the underlying fundamentals of the broader wheat market. There are three factors that fuelled that, including a sharp lift in US wheat stocks during 2016/17, pressure to the downside from selling by speculative funds, and our own record wheat crop.
The lift in US wheat stocks was damaging to US futures levels. Even though exports of US wheat lifted compared to the 2015/16 season, it was not enough to prevent US wheat stocks lifting by 5 mill t. At the end of the day, the CBOT futures contract reflects domestic wheat prices within the US (which in turn should be set by international wheat export price levels), so a surplus of wheat within the US should be expected to put downward pressure on prices.
The speculative funds have made a lot of money over 10 years by weighting their holdings to the short or sold side of the market. This works for them in a market that is trending lower, and that has been the case since the record prices set back in 2007.
With larger global crops and rising global wheat stocks for the last four years in a row, it was an easy play for the funds to be net sellers of wheat, and to potentially add to the downside by sheer force of volume.
Australia was a contributor to the lift in global stocks as well, with our record 35 mill t crop last year, and that also created oversupply issues within our own market. It should be no surprise that the appetite from the trade to keep buying wheat was filled during and shortly after our harvest, allowing our cash market to drift to very low levels.
We now have a changing dynamic. This year US wheat stocks are projected to fall by 6.54 mill t. US stocks will still be above the five year average, but the pattern of rising stocks has been sharply broken. Right now, with drought in spring wheat areas, there is further pressure on final US production estimates, that is likely to flow over to stock levels as well.
Globally we are seeing the first drop in expected production in five years. While global stocks are still set to rise, that may come under pressure from further production downgrades in the US, EU, Black Sea and Australia.
More importantly, stocks outside of China are falling, and outside of China and the US we are about to record our third drop in stocks in a row. This time the tightening of supply should exert some pressure on global markets, with potential for more export demand to push back to the US.
While we don’t know how much longer the lift in US futures prices can be sustained, we can build an argument for a reasonable percentage of the rally to date being retained. That in turn will underpin much higher prices for our 2017/18 harvest, compared to levels seen for old season wheat in early 2017.
