By Andrew Whitelaw | Source: CME, Matif, USDA, Coceral
We are living in testing times in the grain markets, since early 2015 we have seen prices gradually decline. However, is it time to start thinking positively. Are there some glimmers of hope out there?
The only certainty in markets are that prices will change, they will go up and they will go down. We just have to ensure that there are strategies in place within our businesses to weather the bottom of the cycle. Global grain stocks are at all-time highs, and there is no getting away from that fact, however close to half of this tonnage is held in China and unavailable to the global export market – so theoretically tradeable surplus is tighter than reports would indicate.
The bullish factors are starting to build up. In Europe, for example, crops are starting to be downgraded with Coceral dropping EU wheat production by 3mmt since its prior update. Albeit 7mmt higher than last year, which was a poor production year after issues in France. The wheat crop in the US had the lowest plantings in 100 years, and has been beset by various weather issues from dry in the north to wet & snow in the south.
All in all, things are starting to point towards the market having found its floor, and that if things continue to deteriorate we can see upside in prices.
In figure 1, we can see the spot soft red winter wheat contract from 2010 to present. It is clear that it is well below the average, and outside the standard deviation range. The trading range for the spot contract has been quite narrow, not dropping below a weekly average of 410¢/bu since the start of the year. A similar picture emerges when we look at hard red winter (figure 2).
In figure 3, spot French wheat however has been trading for much of the past six months at considerably higher levels than last year.
In all the charts however it is clear that there is a certain degree of seasonality around week 24-30, where prices in the past have risen as a result of improving clarity on the global wheat crop.
There are some reasons to be positive, however we must be guarded in our positivity and not just look towards the data which confirms what we want to see. There are still large global end stocks, regardless of where they may be held.
When we look at the past it is clear that rallies have occurred in week 24-30, which largely can be attributed to increasing visibility of the crop. It is imporant to take a risk management approach to any rallies, to ensure that you participate in rises.
If during the next couple of weeks, the picture starts to look rosier then we could see a lack of support for further price increases, but it’s hard to see them falling much further.
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