In line with the evolving price pattern, CBOT futures have moved to a new high as we came to the end of May.
Prices ended last week at 543 USc/bu on the July contract, and 578.5 on the December contract. The high for the week was set the day before, but the close on Friday was the highest closing price for the July contract since August 1 last year.
When we look just at nearby futures, it was the highest weekly closing price since mid July 2015, and on daily charts there were only four days in last year’s price spike that had higher closing prices.
As May has evolved, the case for stronger wheat prices has slowly grown. Last year’s price rally was driven by the spring wheat drought in the US. It was not backed up by an issue anywhere else. This year the price rally was initiated by the US Hard Red Winter wheat drought, but has been backed up by concerns about the early season in Canada, parts of the EU, parts of Russia and Ukraine, and Australia.
This multiple attack on production potential gives this year’s rally more substance, and a chance of taking out last year’s highs in the near term. Russia in particular is critical, now that they have taken the spot as the world’s largest wheat exporter.
Of particular interest will be southern Russia and Ukraine. Production downgrades from here will not only cut into the total size of the Russian crop, and impact global inventory levels, but also reduce the amount of wheat in an easily exportable position from that part of the world.
Having made impressive weekly gains to new highs, wheat futures would be expected to take a breather in the early part of June. The reality is that timely rains in the next two weeks across a lot of the problem areas globally, will take the heat out of this market very quickly. Even just the possibility of this may be enough to let the market take a breather before setting the next direction.
However, at the start of this week, weather reports were indicating that dryish parts of Russia and Ukraine were not expecting much rainfall for up to two weeks. Against this backdrop the market may decide to not take too many risks and retain, or even add to, the gains of last week.
Based on trends over the past decade, it is still too early in the season for a seasonal high on wheat prices to be in place given the current strength in the market. With issues on multiple fronts for the first time in 10 years, and with a forecast for a decline in global wheat stocks as well, it would almost be unlucky if we did not move to a new seasonal high by late June.
The market will take stock when the USDA releases its WASDE Report, due on June 12. The risk is that the report will continue to remind the market that global wheat stocks remain high, and if production estimates are not pulled back by much, it will remove the immediate need for prices to push higher.
In late June the fortunes for wheat will be determined by whether it has rained enough in Russia and Ukraine, or not. If Black Sea production is under threat it will remain very bullish for wheat.