CBOT wheat futures ended last week with new contract lows for both the March and December contracts. The trigger was a weak weekly export sales report for the US, but it coincided with thin trade in a short trading session after the US Thanksgiving holiday on Thursday.
The market had been threatening to dip down to 412 USc/bu on the December contract for some time. For about two weeks the market had been posting lower highs in a downward trend that extends back to August. On the downside the market kept going close to recent lows set during November, until basically the end of the month where, with no support, the market broke through.
We are now looking at the A$ value of December futures being at A$200 a tonne. This is a level in the market which screams cheap no matter which way we look at it, and it also indicates that wheat is cheap for everyone in global markets. That means virtually no one can grow wheat and make a profit at current price levels. The exception is the Black Sea region, but at US$160 per tonne even they would be under pressure if the weak prices flow through to Russian and Ukrainian wheat prices.
The extent of the drop in values for December futures is close to US$80/t (A$105) from the peak in the market in early July.
To end the week last week, December futures traded down to 412.5 USc/bu and closed on 415.75 USc/bu. March futures closed on 434.75 USc/bu. With the December contract moving towards expiry, the market will shift to the price level set by the March contract. If the market cannot absorb that price level easily, we could be in for more downside in the short term.
That said, we are probably looking at nearby lows for wheat futures at around current price levels. While the market has been lower than A$200/t over the past decade, it has not been very often, and never for very long.
The low prices are triggering a pull back in planted areas, and we could be looking at a five-year low in acreage, according to the International Grains Council. The area planted in Russia is expected to decline after dry weather curtailed planting in some regions. The US will also see a drop in acreage, but final harvested acreage might not change much because of the large areas of spring wheat abandoned this year.
The acreage planted in Europe has not declined as much as expected. According to the IGC, good planting conditions for wheat prevented some acreage moving over to rapeseed. The harvested area in Canada is also likely to lift this year after their drought problems in 2017
However, we will need more than a modest decline in acreage grown globally to fix the over supply issue. A return to “normal” season conditions in Russia for example, should see their crop pull back from the record levels seen in 2017. At this stage conditions in Russia have improved to the point where crops about to enter dormancy have developed well. We will have to see if winterkill issues emerge, and then how well the post winter growing season performs in 2018.
In the meantime the Australian market will be under pressure if the price base shown by US futures remains weak.
