The Christmas/New Year period continued to see wheat futures trade in a range between 420 and 429 USc/bu. There had been an expectation that futures might break above 430 USc/bu in end of year evening up of positions, and with cold weather in the US forecast, but that was not to be. The March contract closed 2017 at 427 USc/bu.
We now enter January with three factors at play. The most immediate is a polar vortex that has spread over the eastern half of the US, with another cold event in the 6 to 10-day forecast. We also have drought conditions in parts of the mid west wheat belt. The third factor at play is just how much wheat has been planted, and will be planted in US spring wheat areas, for the 2018 harvest.
The concern about the cold is also a concern about snow cover for the winter wheat crop. If enough snow falls damage might be limited, but the conditions are extremely cold, and drought affected crops will be a little more vulnerable.
The cold might be enough to trigger a breakout of the trading range to the upside, but even if it is felt that damage has occurred the full extent won’t be visible until after winter. The market is likely to settle down, and pull back from a weather driven, short term rally.
It is likely to be similar for drought concerns. The concerns might support a short term rally, but once again the realisation will be that a favourable growing season can easily reverse dry conditions that have persisted going into, and during, winter.
The final factor at play concerning the planted area will play out over the next two weeks, with the USDA’s January report giving their first serious projection for the size of the US crop. Everyone is expecting the acreage to be down again this year, and if there are concerns about winterkill and drought, it may become a supporting factor for a short term rally.
So, we enter January with potential for a short term rally in US futures, but with a likelihood that such a rally will be shortlived. At best it might push us into a slightly higher trading range for the rest of the US winter. At worst it might peter out and send us back down to the current trading range, with support as low as 410 USc/bu if the market rejects all the supportive factors in the end.
Any support from offshore for Australian wheat prices will be welcome. With slow trading during the Christmas break, Port Adelaide 2017/18 APW prices have fallen to their lowest levels since August last year. It is the same in Victoria and NSW, although east coast prices continue to hold a healthy premium to export based prices in South Australia.
The real question is whether higher futures prices will do anything other than stem the slide in Australian prices. Over December the drop in Port Adelaide prices was close to the drop in the A$ value of CBOT futures, so we might expect some support from a lift in futures values in that port zone.
It might not flow over to eastcoast prices though, unless the $45 to $50 per tonne premiums over Pt Adelaide prices continue to be justified.