With record world wheat production and carryover in 2015, this season was always going to need a helping hand from an abnormal event to push prices higher. Unfortunately, the reality has been a slow gradual grind lower, which has been painful for all involved.
UK sellers have been slow to come to the market, particularly before Christmas. Prices are low and the market hangs on the prospect of a rally, although none of real significance is in sight. Sympathetic banks seem happy to provide cashflow for the moment, so sitting tight is the preferred option for many.
Effect on the UK
The good news is the world’s 2016 wheat crop is unlikely to reach the bumper status of last year’s record output.
Production in the former Soviet Union could be down due to the poor condition of Ukrainian crops, and the chance of a third successive year of record EU wheat production seems a tall order to repeat.
However, there is still a huge carryover of wheat and these burdensome global stocks could keep prices depressed.
The weakening of sterling has given meaningful support to UK grain prices in recent months. Without this, prices would have fallen much harder. If the pound recovers, UK grain prices will have to fall even further to stay competitive on world markets.
Similarly, buyers have been sluggish and only want to take cover for nearby positions, seeing no need to buy forward as there is plentiful supply. As each month comes round it is more or less the same price or lower than the previous one.
While traders and growers alike are desperate for it to be different, all the indicators suggest little is likely to change in the near future, with the chance of market-turning severe winter weather diminishing as the next few weeks pass.
There was a glimmer of hope over the Christmas break when lack of snow cover in Black Sea countries meant crops could be left exposed to plummeting temperatures, but good snowfall came just in time to give the necessary protection.
Even last week’s US Department of Agriculture report suggesting US winter wheat plantings were lower than anticipated caused only a short-term rally rather than the start of a longer-term trend.
Grain market speculators are holding a near record level of sold futures contracts (referred to in market terms as short positions), showing that investors are still expecting the market to fall. However, the sheer size of these positions leaves the market exposed to the potential for a sharp rally if a significant weather problem develops.
So, traders are wondering if Russia’s snow cover will remain sufficient to avoid serious winterkill or whether adverse conditions will develop in the US to impede corn planting in the next few months.
The current state of the world’s global equity and commodity markets is doing little to lift sentiment either. The oil price, often seen as a barometer of commodity markets, continues to slide with the significant sub-US$30/barrel level reached last week. The Chinese stock market’s recent plunges are also causing commodity market concern.
In the southern hemisphere, Argentina has been a recent market influence, with a new president scrapping export taxes for corn and wheat. This, together with the devaluation of the peso, has opened up Argentine surpluses for export and will lead to higher 2016-17 plantings.
Already, Argentine wheat has been competing with EU grain recently, trading to Egypt for the first time in three years. Harvest-time rains have given the crop some protein issues, so it is entering feed wheat markets as well as supplying its more traditional milling buyers.
In previous years, it has taken significant adverse weather to lift markets and this usually means a serious drought through May-July in one or more of the world’s main grain trading regions. Without such a weather issue, it’s difficult to see the next few months offering anything other than more of the same.
Grain market drivers
A summary of the current main price factors and their probable influence.
Red: Factors putting downward pressure on prices – 25% of market influence
The most comfortable wheat and corn stocks-to-use ratios of the past 15 years continue to weigh heavily on markets. With no convincing weather story, negative wider economic factors are also having a detrimental effect on commodity markets. UK wheat exports were less than 1m tonnes up to Christmas, leaving a large proportion of our 2.4m-2.5m tonne surplus still to ship.
Amber: Watch this space – 60%
Markets will start to pay more attention to the condition of developing crops in the next few months, with changing weather playing a key role in shaping market direction. Any adverse news is likely to create a good amount of volatility, so growers need to be ready to move on rallies.
Green: Factors exerting upward pressure on prices – 15%
Black Sea crops currently have good snow cover protecting them from winterkill, but this could change as winter progresses. Dry conditions in India could reduce production and prospects for the drought-affected South African corn crop show little potential for improvement. With speculative funds holding near-record short positions, the market is susceptible to a move higher if they see a need to cover their positions.