Chicago Board of Trade wheat futures finally gained some life and rallied relatively strongly for the week ending last Friday.
The market gained 18.25 US¢/bu for the week, to close at its highest level since November 22. A lot of the upside is being driven by a weak US dollar, which fell 1.8 per cent against a basket of currencies last week and is now down 3.5 per cent since the beginning of the year.
That means the Australian dollar is stronger, limiting gains in the Australian dollar value of US futures. In fact, the Australian dollar value of March CBOT futures sat at just A$199.83 per tonne on Monday morning. That’s up from a recent low of $192.12 on January 17. March futures have averaged A$199.72 per tonne since December 12. When CBOT futures are below A$200 per tonne, we have a very weak market.
While the drop in the US dollar is a major catalyst for the rally in wheat futures, low price levels have also worked to make US wheat more competitive in export markets. We have finally seen that come through in the latest US export sales figures, which lifted week on week and met trade expectations. We also have dry conditions in parts of the US winter and spring wheat areas.
Last year there was a major drought in US spring wheat areas; there are still parts of that region in severe drought. We also have drought extending over significant parts of the main winter wheat production regions in the US, with the extent more significant than this time last year.
Of course, it is very early in the season to be calling a drought for the US. That outcome will only become apparent once we are well into the growing season in late March and April. Even then, a good finish in May and early June can turn their crop around.
There is also the problem of the larger than expected acreage of wheat in the US, which precipitated the decline in wheat futures on January 12. To bite into US stocks, we need either a poor season or a strong lift in US exports.
Meanwhile, cash prices in Australia are yet to react to the rally in wheat futures. Having a short trading week last week did not help, and so we started this week with little guidance as to whether the lift in CBOT futures will filter into the Australian market at all. Working against us is the surge in the Australian dollar. Since January 12, the Australian dollar has lifted from 78.91 US¢, to 81.09 US¢. Currency has removed A$5.42 per tonne from the A$ value of CBOT futures over that time. Over the same period cash prices are close to unchanged, with a small rise in basis. This indicates that it will continue to be hard for our cash market to fight against the strong A$ without further gains in the A$ value of US futures.