Nervousness returned to the wheat futures last week, with strong weekly gains recorded, pushing July CBOT prices to their highest levels since March. On a nearby contract basis we came within about six USc/bu of the highest CBOT futures prices since July last year.
A price rally forming in June is interesting. It normally means that there is a significant problem with one or more northern hemisphere crops, and less likely to be reversed because of the advanced stage of the season.
Since 1994 we have had six years with significant year-on-year price rallies from one November to the next. In five of those cases, the rally commenced in May or June. In the other case the move began in July.
Most of the time we see the market rally mid-year, the gains last into the end of the year, signalling that mid-year we can watch it unfold. That also supports the view that a mid-year rally is mostly driven by factors hard to reverse.
Since May 31, CBOT July futures have posted a gain of 35.75 USc/bu, or 8.32 per cent. The gain in A$ terms has been trimmed back to 6.15 per cent because of a 1.5-US cent lift in the value of the Australian dollar against the US dollar.
The cash market in Australia has responded with gains of around $22 per tonne for old season wheat during the same time period. These are gains of about 10 per cent, better than the lift in the A$ value of US futures.
The additional gain in our market represents a lift in basis. Our basis levels are supported by the lack of rain across the country, and by the trade re-entering the market after digesting significant purchases made at harvest and earlier in the year.
The question now is whether the rally will last or fail as it does about 30 per cent of the time.
The rally is being driven by dry conditions in spring wheat areas of the US and southwest Canada, creeping dryness across the US corn belt, dry and hot conditions expanding in Europe, and dryness in Ukraine and probably part of southern Russia, and of course, our own very dry start to the season.
The caution this year is that we are starting from a position of very large wheat stocks globally and in the US, and if we get significant rain in any of the areas mentioned above, it may kill off the rally.
That said, the sleeper is actually the tightness of wheat stocks outside of China and the US. If we begin to lose more production from Canada, the EU, the Black Sea and Australia, those stock numbers will tighten sharply. That should open the door for more exports from the US, and if we combine that with a further dip in US output because of drought in spring wheat areas, it will drive US wheat stocks down faster than current projections.