Mecardo Analysis - Will it stay or will it go

By: "Farm Tender" News
Cattle News
Jun 04, 2019
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By Angus Brown | Source: CME, ASX, USDA.

It used to be unusual for US wheat prices to rally late in the northern spring and early in the summer. Generally, the winter wheat crop is set and waiting on harvest. In the last few years though, we have seen it more, so it’s worth a look at whether these rallies have been sustained, or if prices will trend lower with harvest.

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The traditional hedging window for Chicago Wheat was January to March. The theory was that at this stage of the year there was plenty of uncertainty around the crop and as such inflated prices. Additionally, any issues with the weather had time to correct before harvest.

Selling Chicago wheat in June and July has been fraught. As dry weather is usually the driver of rallying prices, there was no time for this to correct before harvest, and so higher prices were generally sustained. The rise of Russian and Ukrainian spring crop as major contributors to world exports adds to the upside if they are also dry in the northern spring or summer.

In recent years we have seen more wet weather driven rallies. As reported earlier, wet weather delays the spring crop plant and the winter crop harvest. Both bring concerns surrounding eventual supply and as such push-up prices. However, we have seen wet weather concerns dissipate in the past and prices fall.

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Figure 1 shows we have seen a similar rally in CBOT wheat prices in each of the last four years, and each year the rally has dissipated. In 2016, the rally came at a similar time and quickly fell in June. The wet is reportedly much worse this year.

The June rallies in 2015 and 2017 both disappeared in July and August, with prices returning to lows. In 2018 some of the rally was sustained, as prices for the last four months of the year were still 10% below the peak.

We know the recent rally has been largely due to issues with corn plantings, rather than any real concerns around wheat supply. Figure 2 shows that while the wheat premium over corn, as illustrated by the ratio, is now below average, wheat prices can still decline relative to corn.

2019-06-04 Grain 1

Wheat prices could fall 6%, back to 480¢/kg cwt, without a move in corn. This would still be well ahead of the lows of 430¢ seen just a month ago.

Key points

* We have seen rallies in CBOT wheat futures similar to the recent rise in the last four years.

* In each of the last four years, prices have fallen from highs, but the extent of the fall has been mixed.

* With wheat swap prices nearing $300/t it’s worth looking at selling some to protect international downside.

What does this mean?

Nothing is ever certain in markets and we can see that the recent price rises are not certain to hang around. There are a few more things in wheats’ favour this year, however. Current CBOT wheat prices are only back to where they were for much of the second half of 2018 and early 2019. It could be said that the lows seen earlier were an overreaction and that current prices are more sustainable.

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For Australian producers, the lower Aussie dollar this year sees CBOT nearing the magic $300/t mark. There is a case for taking some cover here, as heavy world wheat supplies aren’t disappearing. Demand also has a question mark, with the full impact of China’s swine fever outbreak still unknown.

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