Wheat futures continued to ease over the past week. The upward trend established from the low on June 1 is still intact, but is being challenged.
We have also been hit with a rally in the Australian dollar, as our currency catches up with the notion that official interest rates cannot stay low forever, and that at some stage central banks will begin pushing rates higher.
The conventional wisdom in Australia had been that our rates would remain unchanged for some time, but that sentiment changed last week, and our currency rallied sharply on the prospect that our rates would lift soon as well.
The net result is that December futures have fallen to A$242.81 per tonne. The peak price based on daily closing futures prices had been A$280.34/t, set on June 6.
From here the value of the currency may not have a big impact if last week’s move was a correction to get us back into line with other major currencies. Our dollar may simply move up and down in reverse to moves in the $US. Moves in the $US will have a balancing impact on the price of underlying wheat futures in $US terms.
Where wheat prices head from here should be determined by the fundamentals for the global wheat market, and how speculative funds read that in the short term.
Current projections for global wheat supply and demand still support a significant year on year lift in the $A value of CBOT futures. Stocks outside China are set to decline for the first time in five years. Stocks excluding China and the US are set to fall for the third year in a row, which means the drop in stocks expected in the US is not the only driver of declining stocks available to the world market.
It is only total global stocks that are not set to fall, where a further buildup of stocks within China will see global stocks lift by 2.55 million tonnes despite the sharp reductions elsewhere.
From here it is hard to see stock estimates for this year lifting. US and Canadian wheat production estimates might decline further. In the EU there is potential for more to come off their estimates, although that might be covered by further increases for Russia.
That leaves Australia, where most crop watchers think that more potential is being lost. Any reduction in our production estimates may be the factor that continues to tighten the broader global measures of wheat stocks for this year.
At the moment stocks excluding China and the US are forecast to fall to 107.87mt, which will be the third lowest since 2007/08. With rising global wheat consumption, the stocks to use ratio on the same basis will fall to 18.27 per cent. This is the lowest level since 2007/08.
At this level of stocks to use, trendline analysis suggests that December futures should close the year close to A$300/t. That is $60/t above where we are this week.
What may stall growth in prices is the still high level of stocks within the US. That might keep end of year CBOT futures prices close to the bottom of the expected range, at around $260/t, or about A$20/t above current levels.
