Wheat futures have given up a lot of their mid-year rally in the last week under a combination of factors.
A major factor was the monthly USDA Report which was not as bullish for wheat as expected. In the wake of that, it is rumoured that a hedge fund in the UK sold off a lot of long (bought) positions triggering a selloff the day after the report was released. We then had a bit of a break in the US weather, with heavier rains than forecast hitting parts of the US spring wheat areas and corn belt. Forecast temperature levels were also pulled back a little, reducing the threat to the corn crop pollination.
A major factor in the USDA Report was leaving forecast corn yields unchanged despite dryness creeping across parts of the corn belt. The USDA assessment was that the dryness in June was not significantly below normal to warrant a drop in yield estimates at this stage.
A stronger corn market is pivotal for wheat futures this year, as it will allow demand for wheat in feed rations to be maintained, feeding into reduced wheat stocks at year’s end, and thus providing price support.
For wheat, the USDA also came in with a winter wheat production forecast that was above market expectations on the back of both higher harvested acreage and higher yields. This pressured all wheat prices, despite spring wheat production levels coming in as expected.
The confirmed decline in spring wheat production will put a lot pf pressure on high protein wheat supplies in the US, with spring wheat stocks moving to multi year lows. Premiums for higher protein wheats should be strong this year.
Soybeans also play a part on driving corn and wheat prices, and here the news was mixed, with yields not being reduced as expected, but exports were lifted against strong sales in July.
Overall the USDA Report was termed bearish, mainly because expected yield reductions for the US corn and soybean crops did not come through.
For wheat, global production was lowered with declines for the US, Australia, China and the EU, but the Russian production estimate was lifted by 3 mill t, and Turkey by 1.5 mill t. The problem for wheat is the ongoing large supply from Russia, which will continue to fill the gap from the EU, and keep pressure on global wheat prices.
The reality is that a mid-year price rally needs support from multiple sources, and nearly always needs support from the Black Sea. A larger Russian crop is not helpful.
Overall, global wheat stocks are down 590,000t from the June Report, but will still be up 2.55 mill t year on year. That is in part because of reduced production and stocks in China. When we exclude China, stock estimates were actually increased, not helped by a lift in opening stock estimates compared to June. This is a measure of stocks now being watched closely, so any lift will be considered bearish by the market.
The current rally started from 463.5 USc/bu on the September contract. It then peaked at 574.5 USc/bu after 6 trading days, and has now pulled back to a low of 507 USc/bu in 7 trading days. So the net gain remains at 43.5 USc/bu, with weather in the US corn belt likely to be the main driving factor in the next few weeks.