CBOT wheat futures had a good rally into the end of January and early February.
The rally did stall as it approached 460 US¢/bu, but an attempt to send the market lower late last week also failed. The upside is being driven by managed funds exiting a lot of sold positions. This buying has produced some strong gains in what’s an otherwise flat market.
Although it is mainly fund buying that has pushed the market higher, behind that is the expanding drought in the US. Again, the area affected by drought has been increased, with almost all of Oklahoma drought declared and 65.3 per cent of Kansas in drought as well, up 12.4 percentage points from a week earlier. Dry conditions in the US at this time of year are interesting, but it’s not their growing season.
A poor snow season means less moisture when it melts, but the real story will be when spring arrives.
Drought conditions can be reversed quickly with a couple of well-timed rain events in key production regions.
Another driver for the upside has been the weakening US dollar. That has helped lift US dollar prices for a range of commodities, including grains. We are also seeing growers lift their sales. US growers have not seen the futures market this high since August last year.
So, we have some selling pressure at the higher end of last week’s range. At some stage, the net short position held by the funds will be reduced to the point where buying pressure begins to ease. That’s when the market will take a breather and look at what’s really happening.
US wheat export sales have lifted a little, but moving ahead of the four-week average still leaves the weekly totals at lower than desired levels. So, demand for US wheat remains an issue.
Elsewhere, we see no issues at the moment with crop conditions in either the EU or Black Sea region. This is critical, as we need to see supplies pull back sharply in the Black Sea region to deliver increased demand for both EU and US wheat. EU export sales are also lagging.
February USDA Supply and Demand Reports are likely to provide a reality check. At this stage, it will be hard to lift US export expectations for this year. That will leave the US balance sheet oversupplied. It will also confirm global wheat stocks going into the end of this marketing year will be very high. We are likely to hit headwinds into February, as strong world supplies are reaffirmed, and as growers make use of higher prices to add to sales, and as fund buying begins to dry up.
Once we are past the USDA reports, the market will refocus on US conditions and what’s happening elsewhere. That might provide some support in the end.