The wheat market rallied early last week, moving sharply higher after extremely cold weather hit the US winter wheat belt. At the same time drought areas remained dry, and crop condition ratings took a further hit.
That all turned around for the second half of the week when forecasts for rain came into the medium term forecast. As the week progressed, the different models began to line up, promising drought areas their first decent rain for months.
The net result was that futures ended the week around where they started, having traded up around 35 USc/bu from the lows set the day before the rally.
Also supporting the earlier lift in wheat prices is the cold spring in the US. Apart from winterkill risks for wheat, the concern is that corn and spring wheat plantings could be delayed. That may induce yield reductions, but may also see some wheat and corn acres move over to soybeans. With another cold weekend last weekend, the concerns will remain for a while longer, generating a bit more volatility.
The flipside to concerns about delays to corn planting is the pace at which plantings can take place once farmers get going. We saw that last year when delays to corn planting were being raised, only to find the crop go in very quickly when conditions were right.
The other factor at play continues to be slow wheat exports from the US. As a percentage of projected exports, shipments to date plus sales are running at their lowest level since 2010. With the marketing year ending next month and with 24 per cent of the export forecast left to ship, the speculation is that US export numbers will have to be revised down from current levels.
The US continues to be up against strong exports from Russia, where a weak Russian rouble is making Russian wheat even more competitive in global markets at the moment.
The view is that weather conditions in the US will keep some volatility in the US grain markets for a while longer.
There is no doubt that the drought in Kansas is an issue, with nearly 84pc of the state drought declared, and with crop condition ratings at a very low level. It looks bad but some reports are suggesting that the crop is simply around three weeks behind in its development, and that seasonal rains from here could still see Kansas produce an average crop.
Others are not so sure, and there are also dramatic temperature swings oscillating between freezing to very hot, all while the most severely hit drought areas remain dry ahead of the forecast rains late this week.
In the end the fundamentals of high US and global wheat stocks will win and dampen any upside from production issues this year. That means that the current volatility will produce opportunities for pricing new season wheat.
Last week’s rally saw APW forward prices hit $275 a tonne at Pt Adelaide, close to $300/t in the Kwinana zone, $294/t in Victoria, and above $300/t port basis in NSW.
While we should see better export prices for wheat than we had during last harvest based on higher end of year futures prices, it will take a big pull back in global production to deliver export parity prices as strong as the current forward prices.