An attempted recovery in Chicago Board of Trade wheat futures last week failed, leaving the market trading either side of 500 USc/bu on Friday, and settling below 500 US cents.
Crop yield estimates for the United States spring wheat crop are above those of last year, but still below the five-year average. This is enough to prevent spring wheat futures from going higher, leaving overall US wheat prices at the mercy of where corn heads.
At the moment growing conditions for corn seem to be alright, but drier, hot weather may put the crop at risk during pollination. While this risk is normal for the US corn crop, this year's smaller delayed crop is more vulnerable than normal.
At this stage it looks as though the corn market will have little direction until the United States Department of Agriculture releases its revised estimates of acreage. There is still uncertainty about the final acreage planted, as well as the acres that were abandoned because of the overly wet season that wiped out some crops.
There is some speculation that US corn prices have peaked, but a sharp selloff is not expected until the August USDA report is released. Even then a surprise in the numbers could send the US corn market in either direction, taking wheat along for the ride.
Meanwhile it looks as though large parts of the Australian grain belt will end July with well below average rainfall for the month. Crops may generally look good, but a building rainfall shortfall going into August is not what we need.
The Australian market seems to be adjusting to the tightening season, with new season prices rising against weakness in CBOT futures, allowing old season prices to lift as well.
Our market is also being helped by a weaker Australian dollar. Last week the currency slipped by 1.33 US cents. This allowed a small lift in the $A value of September and December CBOT futures, while underlying futures contracts lost value.
The Australian dollar is being hit by expectations of another two interest rate cuts, as well as uncertainty about the underlying strength of the economy, including employment, stagnating wages, and consumer spending.
Basically, if interest rate cuts are needed it implies general economic weakness. The Australian dollar is responding accordingly.
The weaker dollar is keeping us competitive in global markets, and protecting our values from the full impact of the weakness being seen in US and EU wheat prices.
Forward wheat prices in export based zones in South Australia and Western Australia are still $20 a tonne below the levels seen in June, but the current trend is upward, and the gap between our prices and CBOT futures (i.e. the basis) is increasing.
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