Grain Market review: Wheat

by Chris Lyddon
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Wheat
Weak tone remains, but quality concerns send bullish message.
 
The world’s wheat market remains in a bearish mindset with record supplies. However, quality problems, or concerns about quality problems, in some of the biggest exporters have injected a more bullish tone to some sections of the market.

“World wheat export prices continued to have a generally weak tone during September, pressured by record global supplies,” the International Grains Council (IGC) said in its Grain Market Report. “However, with uncertainty about quality problems in harvests spreading to more areas, including Canada and Australia, market sentiment was comparatively more bullish for higher grade milling wheats.”

The IGC report also said that the IGC GOI wheat sub-index was little changed from a month earlier, at close to the lowest levels in 10 years.

“Late August price falls saw U.S. HRW values become increasingly attractive relative to comparable supplies at other origins, but Black Sea prices soon regained the competitive edge in early September,” the IGC said. “With harvesting in the region nearing completion, Black Sea milling wheat export prices posted a net decline of U.S.$5 m/m, to U.S.$169 FOB.”

In the U.S., Chicago SRW futures traded at 10-year lows at times, weighed by generally bearish fundamentals, the IGC said.

“However, fresh news was often light, with values frequently responding to movements in other commodities and currencies,” the agency noted. “Minneapolis-based spring wheat futures were underpinned by tight global supplies of good quality milling wheat and by strong early-season export demand for U.S. supplies. While investors at the Chicago and Kansas City winter wheat exchanges maintained heavy net short positions (signaling expectations for weak prices), traders in Minneapolis moved to a net long.”

In the E.U., domestic markets had a relatively firm tone, underpinned by limited good quality supplies, particularly in France, and slow farmer selling, the IGC said.

“However, export quotations remained comparatively weak under pressure from strong competition from other global suppliers,” the IGC noted.

New crop export prices in Australia and Argentina were pressured by favorable crop prospects, it said.

“Egypt’s decision to impose zero tolerance for ergot resulted in a number of shipments of E.U. and Black Sea wheat being held at ports of origin,” the IGC said. “Following the cancellation of a number of tenders owing to a lack of offers from traders, a 0.05% level of ergot tolerance was reinstated on Sept. 21.”

Wheat
No. 1 Hard Red Winter, ordinary protein, FOB Gulf of Mexico.
Source: World Bank
 
In its Agri-Commodities Monthly for October, Rabobank largely maintained its forecast for wheat, despite recent strength in short-term demand, what it called currency vagaries and shifts in speculative positioning.

“Despite these bullish factors, there is no escaping the fundamental picture for wheat, which shows few signals of a short-term sustained recovery,” Rabobank said.

The global market has failed to come away unscathed from recent currency turmoil, the bank said, referring to the weakness of the euro, as well as the much greater weakness against the U.S. dollar of the British pound.

“Export demand is making a significant comeback, supporting wheat futures on both sides of the Atlantic,” Rabobank said. “In recent weeks, Jordan, Syria, Algeria, South Korea and Saudi Arabia have all announced tenders to secure supplies, coupled with a comeback by Egypt’s GASC. Interestingly, international FOB price spreads narrowed considerably, bringing U.S. Gulf FOB into a more competitive position versus last year, with reported inquiries from non-traditional importers.

“The vast weight of the northern hemisphere harvest has driven the fund net position to record levels. As of Oct. 4, managed money held a -151,417 lot net short, the largest on record, highlighting the speculative use of short-term money flows.”

Millie Askew, analyst at Britain’s AHDB Market Intelligence, said on Oct. 17 that “global wheat markets have been buoyed this week on the back of strong demand triggering short covering by investors. Although this season global wheat production is set to hit a fourth consecutive year of record levels, there have been numerous concerns over the availability of higher quality wheat.”

France has had problems with quality and yield, she said, adding that concerns also have been expressed over adverse weather in Australia.

“The rise in U.S. futures prices can be attributed to the increased demand for higher quality wheat, causing investors to short cover funds,” she said. “While the U.K. market has followed the upward trend, the weakening of sterling has also played a part in market movements.”
 
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