What to watch: Forecasts in Central and South America are for dry weather over the next fortnight which could cause further damage to crops
The UK market has continued to focus on logistics and domestic consumption.
Winter has finally arrived in Russia, with snow starting to cover most of Russia’s wheat growing areas
And in Argentina, drought has caused damage to soybean and corn crops.
May 18 LIFFE wheat futures closed on Wednesday January 25 at £140/t, a fall of £2.50/t on the week
UK markets continue to trade in their own unique bubble
With the lack of new usage data or any obvious excitement in ports, the market is still focusing on logistics and making sure domestic consumers get their daily intake. Prices have eroded slowly as the Pound has strengthened against the US$ and the euro.
The fall in UK values is not so much a reflection of the lack of the UK’s competitiveness on the export markets for wheat – after all we are not really in a place to currently export much with such a tight balance sheet, but to ensure the UK does not suck in too many imports.
Reality is futures prices may have dropped by £2.50 since early Jan but in Euro terms it is less than 0.04euros and domestic values have struggled to move at all.
Currently there is not that much on offer in Northern Europe which looks like a cheap import but things could change. If domestic demand increases then there may be more room for imports but currently market price looks to be set by ensuring domestic prices sit just the right side of import values.
Winter finally arrives in Russia
French wheat prices took another leg lower last week, with the MATIF May18 contract now trading below €160/t and around £1/t below the UK’s LIFFE wheat futures for May18.
Exports of French wheat into North Africa are still being harried by slightly cheaper supplies from Argentina and until this eases we are unlikely to see much upwards price movement.
Meanwhile, thanks to the EU’s imposition of import duties on Argentinian maize, French wheat values have now fallen to levels that allow it to compete into animal feed rations, in preference to either domestic or international sourced maize.
This should help put a floor in French wheat values. In Germany, rising water levels on the Rhine have forced part of the river to be closed to traffic.
Ukraine’s winter wheat crop appears to be surviving their winter period very well, with the lowest percentage of crops in poor health in four years. With the exception of some southern parts, snow has started to cover most of Russia’s wheat growing areas, which is timely because temperatures here have finally started to plunge.
Perhaps as a consequence, FOB wheat prices here have started to rise, especially for the wheat grade preferred by Egypt, the world’s largest buyer.
Funds extend record short position
Higher than expected US winter wheat plantings in the latest USDA report provided the catalyst for further fund selling, although prices remain above the contract lows set in December.
While concerns remain over final output, given the current dryness in the US Southern Plains, the bearish fundamental supply position is still encouraging funds to hold, and extend, their record short position.
South American weather concerns are providing some underlying support to corn and soy markets, as is the weakness in the US dollar, but any spill-over support into the wheat pit has been limited
European prices (MATIF) hit new contracts lows recently, as the euro soared to a four-year high against the US dollar.
Sterling has also rallied against the dollar to reach its highest level since the Brexit vote, forcing LIFFE to yearly lows.
EU dynamics remain little changed, with shipments running 20 per cent lower year on year, as aggressive Black Sea origin and, now, Argentinian wheat reduce demand for EU supplies.
Time is running short, and with the EU unlikely to ramp-up exports, ending stocks are likely to increase from current projections.
In summary, global wheat supplies remain more than adequate, and the price premium built into the market on the expectation of lower US plantings, has been eroded.
However, the size of the fund short and the potential of impending US drought may provide long-term support. If the weather concerns in South American persist, funds might start covering their short positions.
Market focused on Argentine weather
Conditions in Argentina remain concerning for producers who have suffered due to a prolonged period of drought, which has not only limited planted area but also yield prospects.
Forecasts over the next two weeks remain dry in Central and Southern Argentina which will only lead to further damage, with 64 per cent of the crop already rated as either poor or fair. Corn crops are also suffering with 47 per cent rated poor or very poor.
Funds remain a lot shorter than usual on the soybean marketing which increases the probability of short covering price rallies as these funds react to unfavourable global weather events.
Rapeseed remains torn between rising soybean prices and the gloomy fundamentals surrounding EU veg oil and biofuel markets, with the most recent blow being the announcement that the EU will phase out the use of palm oil in biodiesel by 2021.
This, as you would expect, was not good news for palm oil demand moving forwards and the resulting price decline weighed further on rapeseed values.
The story for traders will remain the same for the coming weeks, concerns in South America for the soybean crops, whilst EU biofuel policy and imports of rapeseed and canola weigh on OSR.