Chicago Board of Trade wheat futures finally gained some life and rallied relatively strongly for the week ending last Friday. The market gained 18.25 USc/bu for the week, to close at its highest level since November 22.
A lot of the upside is being driven by a weak US$, which fell 1.8% against a basket of currencies last week and is now down 3.5 percent since the beginning of the year. That means the A$ is stronger, limiting gains in the A$ value of US futures.
In fact, the A$ value of March CBOT futures still only sat at A$199.83 per tonne on Monday morning this week. That is up from a recent low of $192.12 set on 17 January. March futures have averaged A$199.72 per tonne since 12 December.
When CBOT futures are below A$200 per tonne we have a very weak market. The futures market does not trade at or below that level for very long. If that pattern continues into 2018, then we should be in for some periods where prices are higher than they are now, despite the strong gains over the last week.
While the drop in the US$ is a major catalyst for the rally in wheat futures, the recent low price levels have also worked to make US wheat more competitive in export markets. We have finally seen that come through in the latest US export sales figures, which last week lifted week on week, and met trade expectations.
We also have dry conditions in parts of the US winter and spring wheat areas. Last year saw a major drought in US spring wheat areas, and there are still parts of that region which are in severe drought.
We also have drought extending over significant parts of the main winter wheat production regions in the US, with the extent of the dry conditions being more significant than at this time last year.
Of course, it is very early in the season to be calling a drought for the US. That outcome will only become apparent once we are well into the growing season, in late March and April. Even then a good finish in May and early June can turn their crop around.
We also have the problem of the larger than expected acreage of wheat in the US, which precipitated the decline in wheat futures on 12 January in the first place. That problem is not going to go away and means that to bite into US stocks we need either a poor season, or a strong lift in US exports.
Meanwhile, cash prices in Australia are yet to react to the current rally in wheat futures. Having a short trading week last week did not help, and so we started this week with little guidance as to whether the lift in CBOT futures will filter into the Australian market at all.
Working against us is the surge in the Australian dollar. Since 12 January the Australian dollar has lifted from 78.91 US cents, to 81.09 US cents. Currency has removed A$5.42 per tonne from the A$ value of CBOT futures over that time.
Over the same period cash prices are close to unchanged, with a small rise in basis. This indicates that it will continue to be hard for our cash market to fight against the strong A$ without further gains in the A$ value of US futures.