AM Markets: Are Wheat Futures Starting to Show Some Mettle?

(Agrimoney) – Has the wheat market rediscovered how to stand on its own two feet? For months, the market has been described as a “follower”, of soybeans and in particular corn.

Wheat futures have been held low by huge world supplies, offered relief only by the odd recovery in prices of feed grains – with which wheat will compete with especially strongly this season if it is to have any hope of running down its massive (and largely low-quality) stocks.

Tables turn

But now wheat futures are, at least, gaining the confidence to peer from beneath the coattails of their row crop peers, and maybe even running into the lead themselves, as soybean and corn markets feel pressure from a large US harvest.

Benson Quinn Commodities noted that in the last session “strength in wheat may have been supportive factor” to row crops, rather than vice versa.

And wheat maintained a touch of outperformance on Wednesday, helping its premium over corn in Chicago nudge higher to $0.73 ½ a bushel December basis – sure, not high historically, but now comfortably above the low of $0.61 a bushel hit two weeks ago.

March basis, the premium hit $0.85 a bushel, above a low of $0.72 a bushel two weeks ago, and the biggest in three weeks.

Export surge

Historically, that may not be such a surprise, with Moore Research graphs suggesting that wheat futures outperform corn from mid-September to late October, reflecting indeed the harvest pressure on corn (with wheat long in the barn in almost all northern hemisphere geographies).

But there could be more than that too to the trend this year, with Tobin Gorey noted a strong start to 2016-17 for US wheat exports.

“Season 2016 exports are well higher than the disappointing sales in 2014 and 2015,” Mr Gorey said.

“The market will be more confident the US will export more wheat at these and somewhat higher prices.”

And this reflects on the spread with corn as “the extra exports means less pressure to use wheat for feed in the US, and so less need to stay price competitive in feed rations.

“We are not sure wheat and corn are quite ready to go their separate ways but sustained strength in exports will reduce the need to chase feed demand.”

‘Still wet’

There are some other factors too helping wheat, with talk of India being in the market for (more) Ukrainian wheat, stoking ideas that the Asian country may take far more imports this season than the 2.0m tonnes the US Department of Agriculture has forecast.

Some have talked of a figure as high as 5m tonnes.

Meanwhile, the Australian wheat harvest continues to attract concerns over dampness.

“Australia’s eastern grain regions are still wet,” said CBA’s Tobin Gorey, reminding of “trade’s worries about grain quality” provoked by the persistent moisture, although noting that drier weather is on its way.

National Australia Bank pegged the crop at 27.6m tonnes – below the official forecast, from Abares, of 28.1m tonnes – although acknowledged that a 29m-tonne harvest was a “real possibility”.

‘Rain damage’

And unwanted rain is growing as a more consistent worry about Canada’s late harvest too, (although implying the potential for yet more lower quality wheat, as milling crop is downgraded).

“Rains are damaging Canadian harvests,” as well as prospects for the Australia’s forthcoming one, consultancy Agritel said.

“Perhaps quality concerns that continue towards the Canadian and Australian crops are having some influence” in supporting prices of higher quality wheat at least, Benson Quinn Commodities said.

‘Swifter harvest’

Not that wheat futures were performing notably well in early deals, standing 0.1% lower at $4.03 ½ a bushel in Chicago for December as of 09:15 UK time (03:15 Chicago time), while higher protein Minneapolis-traded spring wheat for December was flat at $5.02 ¾ a bushel.

But they were at least hanging onto most of decent gains of the last session, and outperforming corn futures, which dropped 0.3% to $3.30 ¾ a bushel, sapped by expectations of an acceleration in the US harvest, after a rain-slowed start.

“Forecasters say considerably better weather is now prevailing in the US Midwest,” CBA’s Tobin Gorey said.

“A swifter harvest this week is likely to keep the pressure on corn prices.”

‘Pipelines in need of beans’

Soybean futures felt the heat from better Midwest weather too, easing 0.3% to $9.50 a bushel for November delivery, with the harvest not only speeding up, but continuing to deliver strong results.

At Chicago broker RJ O’Brien, Richard Feltes flagged an “ongoing stream of favourable yield reports that may improve further as Midwest combines move into full season varieties”.

Indeed, soybeans might be faring worse were it not for strong demand too, with Mr Feltes also noting “rumours of China buying of US soybeans… amid attractive import margins” into the top soy-purchasing country.

Benson Quinn Commodities flagged data showing on deliverable stocks report “show the tightness of US commercial supplies, with beans in deliverable position as of September 23 of 1.27m bushels”, down 900,000 bushels year on year.

“With export inspections running at 159% to last year – pipelines are in need of beans.”

The fate of soybean futures later may depend on whether the USDA announces through its daily alerts system, for a third day running, an export sale of US supplies.

China auction talk

In New York, cotton futures eased too, by 0.1% to 69.65 cents a pound for December delivery, extending declines on the last session amid talk of the appetite that China’s government has for selling down its huge inventories of the fibre.

Reports said that an official in China’s official CNGOIC think tank said that China may next year restart the programme of auction sales from stocks as early as March, after closing this year at the end of this week.

The early start would help the government shift quicker cotton stocks which are not getting any younger, and indeed over which there some concerns over ageing.

“A large long investor position is banking on improved Chinese import demand in the season ahead,” CBA’ Tobin Gorey said.

“These comments might take some of the some of the wind out of their sails.”

Earlier, cotton futures for January closed down 0.8% at 15,325 yuan a tonne on China’s Zhengzhou exchange.