In one sharp move, the wheat market plunged to a new 10-year low at the end of last week, ending speculation that the seasonal low in prices was in place.
The drop came in the absence of any reason for prices to rise and as Egypt – the world’s biggest wheat importer – cancelled a tender, forcing exporters to reoffer at lower prices.
The drop in futures was also helped along by a rally in the US dollar after the chair of the US Federal Reserve made a speech indicating there could be two US interest rates increases before the end of this year.
That triggered a drop in prices, and as the previous low was breached more selling emerged to push prices down by 19 US¢/bu on the September contract.
Nearby futures are at their lowest daily close since September 2006 and are now firmly below 400 US¢/bu. December futures are also approaching that level, closing at 407.5 US¢/bu last Friday night.
The market started falling in what looked like being a bit of an aberration. However, once the market moved below the seasonal low, the selling pressure that emerged ensured a new mark was locked in.
We are now in a weak position in terms of where US futures might head. Even if the market holds, it makes it hard for prices to recover to acceptable levels for our harvest. That was not the outlook that had been emerging.
However, there is some positive news. The supply of higher protein milling wheat is tight. Big crops all over the northern hemisphere have seen lower protein levels this year, as well as downgrading from rain damage.
Also, the Chicago Board of Trade wheat futures contract is based on soft red winter wheat. This basically prices as a feed wheat, particularly when the US has a surplus that needs to enter feed rations against corn.
That’s the case now, and with huge global supplies of feed grade wheat and corn, the CBOT contract is under further pressure. The silver lining for us is that our APW and higher grades should open up a premium to the CBOT SRW wheat contract.
Our APW prices are not likely to follow CBOT futures down in full. On top of that, we should see firming protein premiums for our H2, H1 and APH grades. If we also see pressure on US futures from a higher US dollar our dollar should fall, giving us a further cushion against lower CBOT futures prices.
Unfortunately, none of this will prevent us from facing prices much lower than we would really like.
Although global balance sheets don’t justify a significant year on year fall in milling wheat prices, the market will do what it must to send the message that, at current production levels, the world has too much wheat.
