Futures surge on US stock level drop

Futures surge on US stock level drop

ANALYSIS
Grain
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Nearby wheat futures are approaching values seen in the August price peak.

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Nearby wheat futures are approaching values seen in the August price peak this year.

The market ended last week's trading with a price surge, driven by the release of the quarterly grain stocks report in the United States, which included an updated estimate of the size of the US wheat crop.

The news from the United States Department of Agriculture was worse than expected, with the US wheat crop being downgraded by 1.4 million tonnes, to 44.8mt. This is the smallest US crop since 2002/03. US wheat stocks for September 1 have come in at a 14-year low.

It is apparent that the high domestic wheat stock level that dogged the US market from 2015 to 2020 is well and truly behind us. During that period, we saw the $A value of Chicago Board of Trade futures slump to $A190 a tonne, with the market failing to build on any mid-year price rallies.

With end of year stocks now likely to be under 17mt, CBOT futures no longer get dragged down by the domestic supply hanging over the US market. Interestingly, during the period of low wheat prices from 2015 to 2019 inclusive, US wheat production fell from 62.8mt in 2016/17, to this year's estimate of 44.8mt.

As the saying goes, low prices fix low prices. Eventually the price signal drives resources away from production, until supplies reduce enough to allow prices to rebuild.

With further reductions for the US spring wheat crop in the latest numbers, concerns were also flagged around the potential for further downgrades to the final Canadian wheat production number.

With lower US stocks, and potential for production downgrades for Canada still in the mix, CBOT futures rallied after the report was released on Thursday night, with a follow through gain on Friday night that pushed December futures to a daily close of $A381.93/t.

This is close to the mid-August price peak, which in turn was a multi-year price peak going back to 2008.

In a little over 12 months, CBOT wheat futures have gone from a low of around $A250/t, to $A380/t.

Also helping to fuel the market is Russia, where each week it seems that their export taxes are increased. This is a government mandated system of variable export taxes, designed to manage the pace of exports from Russia, to maintain some degree of control on domestic wheat prices within Russia.

There have been rumours about the consideration of export quotas to also control the pace of Russian wheat exports.

So, we get closer to our harvest with an ongoing cocktail of factors providing support for the global wheat price that will underpin our harvest market.

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