As one report commented this morning ‘did someone just wake up a sleeping giant’, referring to the 21 cent/bushel (£5.50/t) rise in the US market yesterday. For some time now, concerns have been accumulating around the dryness in the main US HRW growing areas, and its potential impact upon yield and final 2018 production. Although the official weekly crop ratings report, released by the USDA, will not commence until next month, the monthly reports for key states have showed a marked deterioration in the crop and well below last year’s ratings. With a cold snap expected to enter the southern plains, with little or no snow cover to protect, this has triggered a surge of short-covering on the potential of lower 2018 output.
EU prices, buoyed by the movement in Chicago, have also firmed this week, up €4/t. Cash premiums have eased, leaving French wheat still above Russian (on a comparable spec), but German/Baltic getting much closer. The rise in Russian prices is mainly due to a continued demand for export wheat, as logistics tighten on weather and farm prices remain firm on the strength of the rouble. The EU commission revised lower their outlook for 2017-18 common wheat exports to 24mln t, which still looks too high against the current pace. In their initial forecast for 2018-19, the commission estimated EU common wheat production at 140mln t, down from 141.6mln t in 2017-18.
LIFFE also gained some support from rising global values, but is still mainly driven by movement in sterling, which over the week has weakened on less than positive vibes over Brexit. The move higher, by just over £3/t, has left physical cash sellers demanding more for their wheat, although end-users and market shorts seem reluctant to chase the market higher, hoping for a scale of retracement to occur.
In summary, the onslaught of winter weather seems to have stirred up the market, especially in the US, where the rationale for the increase has been well known for several weeks. The USDA threw a few crumbs of comfort onto the table last week, projecting US wheat acreage for 2018 higher than expected. However, while this may provide a scale of security over 2018 production, at present, final harvested acreage and yield are deemed more important than planted acres, especially with talk of greater crop abandonment. The fund managers will determine how long this bull-run lasts, as in this week’s position report they were showed still holding a sizeable market short. One word of warning, the current spike in prices has not been witnessed since the market moved to its high in July 2017, where the sheer weight of global supplies then pulled the market back to its December low. The world still is holding record wheat inventories at the end of this marketing year, so crop issues must result in major crop losses for a market to retain its strength – remember, bulls need constant feeding!