Over the past week we have seen Dec'22 United States SRW wheat futures collapse over 100 US cents a bushel after breaking the neckline of a head and shoulders chart pattern. CloudBreak was wary of a further seasonal pull back once this critical support was broken. Technical selling quickly kicked in, and along with strong harvest pressure, prices have been driven significantly lower. Having retraced nearly all of the gains since early March, current Dec'22 SRW futures are sitting at the next level of long-term support of around 930-960USc/bu.
It is not unusual for seasonal weakness to appear at this time of year as harvest selling pressure intensifies and importer demand pulls back as they consume their own domestic crops. The magnitude of the fall has been intensified by geopolitics and improved weather.
Talks have continued between Russia and Turkey over a Ukrainian grain export corridor; the UK has offered to escort vessels and help with de-mining around Ukraine ports. The European Union is also looking to ramp up Ukraine exports via road, rail, and river. This could push Ukraine exports from 10 million tonnes up to 13mt.
Recession fears - Central banks around the globe are becoming more hawkish as they attempt to control inflation. The market was hoping for an economic 'soft landing' however these expectations have gone out the window after US inflation made a new recent high. The US Fed recently agreed to a huge 75 basis point increase at its latest policy meeting to tame inflation. With an increased risk of an economic slowdown and recession we have seen commodities aggressively sell off; grains have not escaped this sell down.
Improved weather - The US and western Europe were experiencing dry conditions leading into harvest and this was adversely impacting crop condition ratings. US crop conditions were struggling at only 30 per cent good-to-excellent, well below average and the lowest since 2014. Recent rains have stabilised crop condition ratings allowing the market to focus its attention elsewhere. An improvement in US Mid-West and Northern Plains weather has also reduced concerns over spring wheat and row crops.
Russian production - Providing additional pressure to prices is rising production estimates in Russia, with private forecasts now at 85-87mt for the 22/23 season vs the USDA at 81mt. (Of note, high insurance costs and export taxes are currently making Russian wheat less competitive.)
Altogether, we do typically see harvest pressure at this time of year, so some weakness was expected. History tells us that this pressure begins to abate once we push through 50pc harvest in the northern hemisphere. The US harvest is expected to be over 50pc complete by end of this week, whereas EU and Russia harvest has only just started. CloudBreak expects a seasonal low on US futures is not too far away. Major exporter wheat stocks-to-use are still extremely tight, and a solution for bulk Ukraine exports is yet to be found. A July/August rebound could be on the cards amid seasonal strength in importer demand.
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