By Andrew Whitelaw | Source: CME, Mecardo
The futures market has taken a tumble in recent weeks as conditions in the northern hemisphere appear to be better than first anticipated. The middle point of the year tends to provide the market with good opportunities for pricing. At this point, with futures falling - have we already had our rally?
The midpoint of the year is well known for providing the market with a mid-season rally. This occurs from worries relating to the condition of the northern hemisphere crop. The market is always on edge and small concerns can drive the market, we can see this in Figure 1 which shows that seasonally there is an upward bounce around week 27.
In recent years, the futures market has struggled to maintain the mid-season rally. Last year the market rallied considerably on the back of concerns to the US spring crop, eventually, the reality of a record Russian crop in conjunction with record global stocks collapsed the rally. In this season, the market rallied through May/June before gravity has taken over with prices falling to pre-rally levels.
There are mounting concerns around the world but at present, the most important driver of pricing will be conditions in the black sea region. As we are all aware, Russia has been increasing production in recent years resulting in the nation becoming the world’s largest wheat exporter. This year sees their production fall due to poor weather, albeit still producing an above average crop. Since the start of harvest, prices in Russia have been under pressure (Figure 2). This has resulted in prices falling to the lowest level since February.
There are bullish factors at play and the market could easily be driven higher, for example by expected yields or political interventions. The local market, however, is a different story at present. The poor weather in recent months has driven concerns for the coming crop, especially on the east coast where domestic demand is highest. At present, the fall in international values has had little impact on new crop basis with levels remaining very strong. This is especially so in Port Kembla where premiums over Chicago futures have risen just shy of $100/mt (Figure 3).
There is further rainfall expected for most of the countries cropping regions over the next fortnight. This will give some relief for farmers and add some confidence to buyers that supplies will be available at harvest.
Wheat futures prices have fallen from their May/June rally, however, bullish factors could still provide some upward potential over the next month while the northern hemisphere harvests. Overall the potential for very large movements upwards is limited.
The good news from a pricing perspective that Australian wheat is commanding a strong premium which is at present cushioning producers from downward movements overseas. On the flip side, these premiums are in place due to the potential for poor production.
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