The rally in CBOT wheat futures took a breather last week, with the value of nearby July futures down A$1.07 per tonne.
CBOT futures have lifted by A$12 per tonne since mid-June, while Australian prices are up $20 per tonne.
It would appear that 2016-17 wheat prices moved to levels lower than would be expected, given the underlying fundamentals of the broader wheat market.
Three factors have fuelled that, including a sharp lift in US wheat stocks during 2016-17, pressure to the downside from selling by speculative funds and our own record wheat crop. The lift in US wheat stocks was damaging to US futures levels. Even though exports of US wheat lifted compared to the 2015-16 season, it was not enough to prevent US wheat stocks lifting by five million tonnes.
At the end of the day, the CBOT futures contract reflects domestic wheat prices within the US, so a surplus of wheat within the US should be expected to put downward pressure on prices.
Speculative funds have made a lot of money over 10 years by weighting their holdings to the short or sold side of the market. This works in a market that is trending lower, and that has been the case since the record prices set back in 2007.
With larger global crops and rising global wheat stocks the past four years, it was an easy play for the funds to be net sellers of wheat, and potentially add to the downside by sheer force of volume.
Australia contributed to the lift in global stocks, with a record 35 mill t crop last year. That also created oversupply issues within our own market. It should be no surprise that the appetite from the trade to keep buying wheat was filled during and shortly after our harvest, allowing our cash market to drift to very low levels.
This year, US wheat stocks are projected to fall by 6.54 mill t. US stocks will still be above the five-year average, but the pattern of rising stocks has been sharply broken. With drought in spring wheat areas, there is further pressure on final US production estimates that is likely to flow over to stock levels as well. Globally, we are seeing the first drop in expected production in five years.
While global stocks are still set to rise, that may come under pressure from further downgrades in the US, EU, Black Sea and Australia.
Stocks outside China are falling, and Australia is about to record a third straight drop. This should exert pressure on global markets, with potential for more export demand to push back to the US.
We don’t know how long the lift in US futures prices can be sustained, but can expect a reasonable percentage of the rally will be retained.
That will underpin much higher prices for our 2017-18 harvest.
