The first half of March has seen a consecutive rally on Chicago wheat, corn and soybean markets, due to increased bullish risks induced by large fund short positions and dry weather. In an attempt to take risk off the table and buy back their short positions, managed money funds exaggerated the recent rally which was based on weather concerns in parts of the US wheat growing regions. Investment funds have positioned themselves on the short side of Chicago Board of Trade (CBOT) wheat, due to recent record levels of supply and global ending stocks. Currently, 2015/16 global wheat production is estimated at 730MMT, 60MMT higher than the 10-year average and the highest level of production in the past decade. The trend of increasing global wheat production has been occurring over the past three years with consecutive growth in production, equating to increased levels in world ending stocks.
The biggest story however, is the demand structure over the same time. Global demand has continually increased every year over the past decade and 2015/16 saw record consumption at 720MMT, 60MMT over the 10-year average. Demand does not fluctuate at the same rate as supply, highlighting the continued need for global wheat production to remain at record levels to feed continual increased demand.
2016/17 is starting to show signs that production is likely to decline year on year for the first time in four years. If this occurs there will be pressure on ending stocks and the global wheat balance sheet will need to tighten. Dry weather leading to a reduction in planted acres and yields is headline news, with concern mainly focused in the US, India, Ukraine and Russian regions. Notably, the yield and production retracement isn’t yet alarming, however there is a long way to go until the Northern Hemisphere harvest is in full swing.
Unfortunately, Chicago wheat has not been the only market to rally. The AUD has posted gains for the month of March printing a low of 0.7103 and a high of 0.7680 – a surge of 5.74 cents or 7.7% and the highest since July 2015. The AUD/USD has been running up recently on better than expected economic data, such as the unemployment rate, and poor economic data from US weakening the USD at the same time.
Due to dry weather conditions last year, India entered the Australian market and purchased 500KMT–700KMT of APW wheat. This year, India’s conditions look to be drier. It has been rumored that vessels are already trading into India and 600KMT-750KMT of exports are feasible for the current season. Such an event would be supportive to Australian basis levels in export zones.
The next three to six months see us entering a period which is likely to cause volatility in markets, with increased demand over the past decade relying on another large global wheat crop. Current conditions around the world are making this more and more doubtful and we could see ending stocks for 2016/17 season becoming tight. Global production is one to closely monitor and price will be directly correlated with this.
Managed funds hold a large short position in Chicago wheat futures. This will add fuel to the fire in the event of a rally, as these managed funds will need to jump on the buy side to cover positions. The Australian economy is still currently under financial pressure and banks are expecting a rate cut in the coming months to stabalise inflation. In notes released this week, the Reserve Bank of Australia highlighted their concerns over the raising AUD and the impact of this on our economy. The following charts of CME wheat terms highlight the dampening effect of the currency rally over the last month.