The sharp rally in CBOT wheat futures that kicked off in late January came under intense pressure at the end of last week. Prices have pulled back to levels we had in the first half of February and are in danger of testing the top of the January trading range if the market gives up much more ground. At that point prices will have returned to the trading range of last year’s multi year lows.
The trigger for the sharp price declines on Thursday and Friday nights last week were poor export data for the US, a rising US dollar, and rains forecast for Kansas, with potential for some of the driest parts of the US Hard Red Winter wheat belt to get at least some rain.
The combination of all three factors saw US funds turn sellers once again, returning to their bearish view of the wheat market which is still dominated by excessive global stocks.
There has also been an early projection for Russian wheat production, at levels similar to last year’s bin bursting record. This projection is predicated on yet another mild winter for much of southern Russia. In the past few years, mild winters have been closely correlated to rapidly rising production from the Black Sea region.
Since 2007/08 most of the major price rallies have been associated with problems in Russia and/or Ukraine. Sometimes that has supported issues elsewhere, but a political or production issue in the Black Sea has been a common factor.
Last year we saw the wheat market rally mid year on the back of the spring wheat drought in the US. At the time it was seen as a strong rally, but compared to rallies over the previous decade, it was a moderate price rise.
Last year’s rally failed because there was no support from a production issue from the Black Sea. In the end the US drought was completely swept away by the huge crop from Russia, even though the US crop was pushed to multi year lows.
This year we are faced with the same problem. Even if the US crop is severely hit by drought in key parts of the winter wheat belt, it will amount to nothing if we continue to get strong production from the Black Sea region.
Late last year, and early this year, there were concerns for the Russian crop. Less than ideal planting conditions saw some acreage not planted. We then had dry conditions limiting early crop establishment. We came well into the new year with limited snow cover, leaving the Russian crop very exposed to a cold snap.
At that time the crops were very advanced having not been pushed into dormancy. When the cold snap arrived so too did protective snow cover. Some winterkill damage might have occurred, but the consensus is that it will be minimal.
Meanwhile the early mild conditions have allowed the Russian and Ukraine crops to develop strongly, to leave us yet again with strong yield potential on the back of what will end up being another mild winter overall.
The drought in the US may well continue, and be supportive of CBOT futures prices, but the risk is that it will be swamped by the large stocks that Russia will carry into the new marketing year, and yet another very large crop from Russia and Ukraine.