Wheat futures finished last week on a strong note, with the highest close on the March contract since January 23, and its second highest close since December 18. Basically, even though new nearby highs weren’t achieved, the market pushed back to the top of the trading range seen for the last couple of months.
In $A terms the market is not as strong because of a relatively sharp lift in the Australian dollar over the past week, which has seen our currency move back above 72.5 US cents.
Wheat garnered favour at the end of the week on the back of ongoing Chinese/US trade talks. There is speculation that China has already bought US wheat, and that they may buy more once trading arrangements improve between the two countries.
We also have the prospect of winterkill damage to parts of the US wheat crop in the wake of last week’s polar vortex that pushed temperatures to extremely low levels. While many winter wheat areas have adequate snow cover, there are concerns for parts of the crop because of the speed with which temperatures fell, the extent to which they fell, and poor snow cover in parts of the southern wheatbelt.
The market will try to assess the risk, although winterkill damage does not show up until dormancy breaks and spring gets underway. What is fuelling the concerns though is the prospect that the USDA will confirm a lower US winter wheat acreage when it releases its delayed crop reports on February 8.
It is still not plain sailing for the wheat market though, for either the short run, or the longer term. On the export front European exporters can still not ramp up their pace of shipments significantly. Shipments are still more than 20 per cent down year on year, and revised estimates for EU ending stocks will leave them close to the five-year average.
Concerns about stock levels in the EU came even as French wheat was sold into Egypt ahead of Russian wheat. It seems that the pace of exports from France in particular, has just been too slow so far to allow EU stocks to be rundown significantly.
Longer term, eyes are turning once again to Russia. While North America has been in the grips of a massive cold event, the winter across much of Russia has been described as being benign. Mild winters go hand in hand with strong grain production, and early production estimates are already running at 80 million tonnes for Russia. This will be up 7.9mt on last year, and just 6mt below the record crop from 2017.
The Russian crop has good snow cover. Not only is this protecting the crop against winterkill, but will provide good moisture levels as spring arrives. The Russian wheat crop was rated as being in average condition going into dormancy, and looks like emerging from dormancy with strong potential.
So, we are looking at entering the 2019/20 marketing year with exportable stocks available from the EU, on top of what should be an improved crop this year. We are also looking at strong supplies available for export from Russia again, even though they will have run their stocks down over the past year.
Both of these will continue to create a headwind for US wheat futures, and put a limit on expected price gains in 2019.