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Tuesday, March 24, 2015

At last! Grain market rallies as bears are exposed

By Angus Brown  |  Source: CME, ASX, CFTC

Key points

  • US wheat market has rallied 8% over the last three weeks on the back of dry weather concerns.
  • Speculators currently hold a large net short position on CBOT, meaning they expect the market to fall. This has opened up exposure to price upside.
  • Large net short positions usually end in a rapid price rise, but require a trigger which we haven’t seen yet.

2015-03-23 Wheat Up And Speculators Exposed FIG 1

2015-03-23 Wheat Up And Speculators Exposed FIG 2

2015-03-23 Wheat Up And Speculators Exposed FIG 3

CBOT wheat futures have rallied nearly 8% in the last three weeks on the back of dry weather in the US. The heavy bets that speculators have on CBOT have contributed to the rally. Speculators betting on a falling market leave themselves exposed to rising prices, ie they get it wrong. For this reason, any issues with supply can result in speculators with large exposure quickly becoming buyers, pushing prices higher.

The rally in the CBOT Wheat spot contract over the last three weeks has taken prices back to the highest levels since late January, at 536¢/bu, or $A254/t (figure 1).  There hasn’t really been a lot behind the rally. That said, concerns surrounding US production, as a result of dry weather in key winter wheat states, have been the most cited issue.  The other driver, which appears to have added support, has been wheat getting too cheap relative to corn.

It’s no surprise to see wheat prices rallying at this time of year: the northern hemisphere winter crop is at a vulnerable stage, and the US Commodity Futures Trading Commission (CFTC) data suggests speculators are highly exposed to rising wheat prices.

Figure 2 shows the long (bought), short (sold) and net long positions held by speculators on CBOT Wheat up to last Wednesday.  The rising short position, and falling long position has resulted in a ‘net long’ position (longs minus shorts) at close to record lows. By definition, therefore, the net short position is close to record highs. This means that speculators have been placing bets on the wheat market falling.

Recent concerns surrounding US wheat production late last week gave the market a quick lift as speculators reportedly bought back short positions to limit exposure to rising prices (this is likely to be shown in this week’s CFTC report).  The question is whether the dryness issues will mean we’ll see speculators continue to buy and push prices higher. The answer, as usual, depends on rainfall.

The good news for growers is that, in the past, wheat prices have had their quickest rallies from large negative net long positions, such as we saw in October last year (figure 3).  However, the bad news is that speculators have a large negative net long position for a reason; they expect prices to fall. The last two large negative net long positions lasted two to three months before turning around and taking prices higher.  

What does this mean?

The large short position, and small long position, held by speculators on CBOT should end in a rapid price rise. While the last two large net short positions have lasted around 2-3 months, this is not really bad news as it means speculators are likely to start to buy back positions before the Australian harvest.

In terms of the current rally, rain in the US will make it go away relatively quickly, but prices are likely to find further support at US480-500¢/bu.  There could be some price pain leading into the northern hemisphere harvest in June and July, if speculators get it right. Selling swaps at A$265-270/t with the view of closing out in July might be a relevant strategy for those not wanting to enter the second half of the year with wheat developing but priced at $240-250/t.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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