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Wheat Market Update - Friday 29th January 2010
UK and Europe Harvest Overview
Global wheat markets are still reacting to a bearish USDA report, released on 12th January, which has caused a set-back in wheat prices. They have returned to trading on fundamentals with ample global wheat availability combined with a lack of new crop weather issues weighing on markets.
UK wheat futures continue to follow U.S. and European markets lower whilst a strengthening pound is further depressing prices. A lack of farmer selling, however, is making spot physical trade very illiquid. Farmers do not seem prepared to sell their wheat below the perceived costs of production; resulting in a slight widening of bread making wheat premiums as the physical prices try to catch up with the lower futures prices.
Defra estimated their final UK wheat production figure at 14.379Mt on 14th January, down from 17.227Mt last year, and inline with trade expectations. Meanwhile, Strategie Grains, an independent market analyst, released their first 2010/11 wheat crop estimates on 21st January. UK production has been forecast at 16.052Mt, an increase of 1.673Mt from 2009/10 levels, on higher plantings and better yield estimates whilst total EU production is seen 3.886Mt higher at 133.735Mt. Favourable weather will be important during the spring and summer yield forming periods to achieve these levels.
The UK had its busiest export month during November with 202,000t of wheat leaving the country to key destinations including Spain and Portugal. However, exports are almost 900,000t below the level they reached at this point last season.
The recent spate of cold weather has done no harm to maturing crops in the UK, with ample snow cover offering good insulation against sharp frosts. This is echoed across Europe and the Black Sea where the cold weather appears to have done minimal damage to crop prospects.
US/World Overview
US wheat markets have been trading lower, weighed down by ample availability (the highest stock levels in 22 years) and a severe lack of export competitiveness, compounded further by a strengthening of the US dollar value. The U.S continues to price itself out of Egyptian tenders with the most recent tender for 180,000t, announced on 28th January, going entirely to Russia. U.S. wheat was $42/t higher than European prices and with the Egyptian harvest set to start in April; little time is left for U.S. and France to export their vast surpluses. Attention will now be focused on the USDA’s weekly export data over the remainder of the season in order to get a clearer understanding of the final carryover stock figure.
Meanwhile, traders appear a little undecided over the significance of the latest bank reforms suggested by President Obama on 21st January 2010. The initial proposal to separate retail banks from investment banking activity seems to have been dampened down in the State of the Unions address on 28th January after banks reacted unfavourably to the idea. The exact consequences of the proposal are unclear in the long term but would almost certainly lead to increased volatility in commodity markets in the near to medium term.
Summary
Global wheat markets are trading lower on the back of bearish fundamentals whilst currency continues to influence daily volatility. In the short term there appears to be little upside price movement although we could see some consolidation at these levels if traders feel the market is beginning to become oversold. Spot physical selling in the UK remains thin but this should ease once farmers become use to the lower prices. Having missed out on the recent Egyptian tender, wheat prices in the U.S. and Europe need to fall further to become competitive on international markets. In the medium term, U.S. banking policy is likely to have an influence on fund activity whilst traders will start to focus on global weather events through the spring and into the early summer. Previous experience has demonstrated that prices can quickly move higher if there is an unfavourable weather event in a key growing region.
Wheat Market Update - Friday 8th January 2010
UK and Europe Harvest Overview
Global wheat markets have moved away from traditional market fundamentals at present with investment fund money flow continuing to dominate the headlines. Fund rebalancing, involving index funds readjusting their investment portfolios at the start of a new year based on performance criteria, have been widely tipped to send wheat markets higher over the coming weeks. This, coupled with stronger outside markets have offered spill over support on UK wheat markets although values have been fairly range bound. Bearish fundamentals continue to be ignored with it proving extremely difficult to determine when these will eventually prevail, thus potentially placing downward pressure on wheat prices.
With the UK expecting to receive its biggest snowfall in 30 years and low temperatures prevailing across Europe it is unsurprising that traders are turning their attention to weather reports. Crop damage is likely to be minimal with snowfall in some areas of Europe providing protection against frost damage.
Now the majority of farmers have received their Single Farm Payment, coupled with little consumer activity, physical wheat markets remain very quiet at present. A slight reduction in UK bread wheat premiums has been seen recently (albeit primarily for nearby positions), although flat prices have remained similar on the back of underlying futures support.
US/World Overview
Index funds are expected become more active in U.S. agricultural commodity markets in the coming weeks potentially offering further support to wheat values. However, the next USDA report, due out on the 12th Jan 10, will serve to remind traders that there are ample U.S. and World stocks. This should limit any fund led price uplift.
Meanwhile, the severe cold weather in the U.S. is leading to mixed reports about potential damage. Some reports suggest that adequate snow cover will protect crops whilst others suggest that bare patches in Kansas and Oklahoma could lead to damage.
Egypt filled their recent tender with 240,000t of Russian wheat, signifying further that U.S. wheat is uncompetitive on world markets. The closest U.S. offer was still $6/t behind the tender price, even before the freight disadvantages were taken into account.
Summary
Non-commercial investors are dominating the headlines at the moment with index funds set to rebalance their portfolios over the coming weeks. This offered support to global wheat markets over the festive period could potentially lead to further price rises over the coming weeks. It is a very technical market at present and fundamentals continue to be ignored. However, the next USDA report will offer a reminder of the large U.S. and world wheat stocks which should limit any upside movement.
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