Futures market edges higher
CBOT wheat futures had a good rally into the end of January and early February. The rally stalled as it approached 460 USc/bu, but equally, 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 relatively strong gains in what is 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 just about 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 is not their growing season. A poor snow season means less moisture when it melts, but the real story will be when spring arrives, and whether that brings rain or not. Current drought conditions can be reversed very quickly with a couple of well timed rainfall 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 for many, it is the best pricing opportunity since their harvest finished.
So, we have some selling pressure at the higher end of last week’s trading range, and at some stage the net short position held by the funds will be reduced to the point where buying pressure begins to ease.
That is when the market will take a breather and look at what is really happening. And what is happening? Well, we have seen US wheat export sales lift 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.
Also, 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.
On that note, EU export sales are also lagging those of last year as they face the headwind of a strong euro, and stiff competition from Russian exports.
The February USDA Supply and Demand Reports are likely to provide a reality check. At this stage it will be hard for the USDA to lift US export expectations for this year, and that will leave the US balance sheet oversupplied.
It will also confirm that global wheat stocks going into the end of this marketing year will be very high, and we are some time away from getting USDA’s look at the upcoming year.
So, we are likely to hit headwinds as we move through 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 crop conditions, and what is happening elsewhere in the world. That might provide some support in the end.