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Market bears continue to nibble on wheat as large crops loom

It’s going to take something significant to spark a meaningful price rally at this point

Wheat traders breathed a sigh of relief in early March as Chicago futures rose, possibly signalling that the market is at least temporarily satisfied with recent contract lows.

Speculators have piled into the short side of the wheat market in recent weeks, likely limiting further price falls. But bigger global crops on tap for 2019 and continued export competition could keep the lid on prices in the coming months.

By March 11 close, CBOT May wheat had tumbled 13 per cent since mid-February when the latest price skid began. Within the two weeks ended Feb. 26, commodity fund managers had sold nearly 43,000 futures and options contracts.

History has shown that speculators are not as easily spooked out of bearish wheat bets as they are for corn or soybeans.

Money managers had maintained a net short in CBOT wheat futures and options for 22 straight months ending around June 30, 2017, averaging about 83,000 contracts.

Through Feb. 26, money managers held a net short of 58,567 CBOT wheat futures and options contracts, well off their record of 162,327 set in April 2017. They also established a record short in Kansas City wheat of 41,557 contracts, topping the pessimism from December 2017.

At this point, a sustainable price rally might require something like a weather problem in a major growing region or a serious boost in U.S. export demand, at the very least. But there is not much time left for those things since new-crop supplies will start coming online within a few months.

Through Feb. 28, top exporter Russia had shipped 28.8 million tonnes of wheat for the 2018-19 marketing year, up 6.5 per cent from a year ago.

But export targets for 2018-19, which ends June 30 for Russia, are around 37 million tonnes, some 11 per cent below last year. This means that the pace must fall off considerably in the next four months.

Cheaper wheat export prices out of the Black Sea have been increasingly sidelining competitors and they have not recently indicated the expected tightening in supply.

Free on board (f.o.b.) prices for Russian wheat fell throughout February in the spot month, dropping an estimated US$19 per tonne.

A weaker ruble makes Russian grain more attractive in the global dollar markets and is favourable for domestic farmers. The ruble has strengthened since the beginning of the year but is about 16 per cent weaker than a year ago.

The export pace from the European Union will also be important to watch in the next four months, as last year’s wheat harvest was relatively weak. EU is a big competitor for business in the key importing region of North Africa and the Middle East.

Through March 3, EU countries had exported 11.7 million tonnes of soft wheat, down 16 per cent on the year. That was an improvement over the pace from three months earlier, when exports lagged the previous year by 29 per cent.

However, Egypt rejected a Romanian cargo March 12 over issues with quality, despite no known widespread problems with Romanian wheat. The world’s largest wheat importer upped quality restrictions in 2016.

Like the ruble, the dollar is linked with international demand for U.S. wheat, and its recent strength could be considered a hindrance for sales and/or optimism in the wheat market. The dollar index has been trending upward.

Global wheat production fell four per cent in 2018-19, the first cycle in six years that world output did not rise to a new record. As of now, the 2019-20 crop is not expected to face the same hardships, and supplies could rebound in a big way if weather allows.

Recently, Russia’s Agriculture Ministry pegged the 2019 wheat harvest between 75 million and 78 million tonnes but noted that 80 million is possible with good conditions. Consultancy Sovecon maintains an outlook near 80 million.

It has been reported in the past that Russian agriculture officials have been intentionally conservative on crop estimates to support local grain prices and to secure state funds to support the sector. Larger Russian yields have also genuinely surprised the wheat market in recent years.

Russia harvested 72.1 million tonnes of wheat in 2018, sharply down from 85 million in the previous year, which was initially underreported. But with current estimates near 80 million, the 2019 crop could end up even larger with favourable weather in the coming months.

The European Commission has set EU common wheat production at 140.8 million tonnes for 2019-20, up from 128.7 million in the previous year. The bloc’s wheat output last year hit a six-year low on drought conditions in key production areas.

Australia’s crop was also cut short by drought in 2018-19 with just 17 million tonnes, the smallest output in 11 years. A revival in the Aussie and EU harvests this year could mean a year-on-year surge in exportable supply of at least 11 million tonnes from just these two countries.

The U.S. Department of Agriculture predicts the domestic wheat crop to rise about one per cent on the year in 2019-20. Wheat in the heaviest-producing Southern Plains is in much better shape than a year ago, which was plagued by dry weather.

Argentina just finished up its 2018-19 harvest in January, reaching a record 19.2 million tonnes. Nearly three-fourths of that wheat is expected to hit the export market.

About the author

Columnist/Reuters

Karen Braun is a Reuters market analyst based in Chicago. The views in this column are her own.

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