Surging wheat futures fail to follow through

Surging wheat futures fail to follow through

ANALYSIS
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Chicago Board of Trade futures in decline for the last four sessions of last week.

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The rally in wheat futures triggered by the United States Department of Agriculture quarterly grain stocks report failed to follow through, with Chicago Board of Trade futures in a declining trend for the last four sessions of last week.

Prices are still in the upper end of the range for the life of the December futures contract, but the surge in prices on the back of lower US supplies was not enough to take out either the August, or the May highs on the December contract, or the rolling nearby contract.

This is a function of how far through the year we are.

Early in the year, the market is driven by what is happening at the time, plus a margin for risk given the uncertainty of projections before the crop is in the bin.

RELATED READING: Futures surge on US stock level drop

At this time of the year, the market is still being driven by what is happening, but much less is attributed to risk given that more is known about how crops have yielded.

Of course, there are always lags in data and final revisions to numbers.

That process continues for some time, with assessments of stock levels likely to result in a revision to production numbers for months to come.

There is still time for data revisions to provide shocks to the futures market, but the potential is waning, and the size of the adjustments is likely to be smaller.

So, much lower risk premiums are embodied in current December 2021 and March 2022 wheat futures.

The market will keep responding to data revisions, demand from importers, and the pace of exports from major exporters.

Also, on the table will be the level of export taxes being applied by Russia, and therefore the cost of Russian wheat to importers, as well as ongoing talk that Russia may impose export quotas early next year.

We also have turmoil in energy markets, which flows over to any grain or oilseed that is involved in biofuel production.

There is also concern about inflation.

The inflation issue is both general in nature, as well as for food.

Food prices are now at a 10-year-high led largely by the current level of cereal grain prices.

We are also looking at the lowest wheat stocks to use ratio across the major exporters in close to 20 years.

Under inflation fund managers tend to move away from share markets and invest more heavily in commodities as a hedge against inflation. In the grains market, supply concerns (e.g. tight exporter stocks) and rising prices tend to see importers pull forward their purchases.

We might not see wheat prices surge higher in the short term, but there is enough to provide ongoing support at high levels into our harvest.


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