Looking for a new sign in the wheat markets?
Wheat markets continued to be pressured towards the end of June, but so did the rest of the grain markets complex as it tries to price in a global trade war. Note that last week we see managed money go net short on corn, soybeans, Chicago soft red winter wheat, and oats. Only Kansas City hard red winter wheat speculators are long the cereal.
Trying to support markets has seen some smaller production estimates come out across the Atlantic Ocean. French consultancy Agritel said that the 2018/19 Russian total wheat production figure would come in at 67.4 million tonnes. The agency blamed adverse dry weather conditions for the expected 21.5% decline from last year’s record crop. Digging into the details, Agritel said that the Russian winter wheat crop would come in at 50.1 MMT, a 19% decline from the previous year. Russian spring wheat production is forecast to fall by 28% to 17.3 MMT. The agency projects that the average yield will fall from 46.1 bushels per acre to 38.8 bpa.
This supported wheat prices in the EU, but the numbers for soft wheat production in the EU are facing similar pressures. The European Union’s agronomy division (MARS) announced that the bloc’s average soft wheat yields will decline by 1.2% year-over-year. The 89.8 bushels per acre projected this week is down from the 92 estimated last month.
Weakness in Europe and Russia are likely going to be Bulgaria’s gain. The nation’s agricultural ministry said this week that the country expects its 2018 wheat crop to hit an all-time high. The agency projected 6.1 MMT in production. The country expects its exports to come in around 4 MMT. Look for the country to make a splash in Europe.
Where we once felt terror for a trade war, the grain markets have reacted with full-blown panic. No speculator wants to play in this risky game where no one knows what the next move is going to be. Thus, the simple solution is to get out. That’s what you’ve seen as speculators have sold out of their positions. No one wants to play in the sandbox when sand continues to get thrown in their face!
However, we need to avoid some of the “recency bias”, which is the exercise of trying to put everything that’s happened in the past month or so into context of a bigger picture. For example, front-month contracts for spring wheat prices are trading at basically the same value that it was 13 months ago. And yet, US spring wheat exports at this time a year ago were moving along at a pretty good clip.
With this in mind, the 2017/18 US spring wheat exports in 2017/18 were well below what was shipped out 2016/17 and the five-year average.
In Canada, farmer deliveries of wheat (excluding durum) are tracking behind the 3-year average while exports and doing better than last year and the seasonal average.
Basically, the main takeaway here is that there has been some strong movement in 2017/18 from the port, but not necessarily from the farm. We would expect some pressure towards the back half of summer as producers look to empty bins. However, it’ll be basis levels that take the biggest hit, with the futures market not really accounting for individual/localized sales activity. Thus, with the futures falling, one might be wise to start paying more close attention to spring wheat basis levels.
(Column courtesy Alberta Wheat Commission)