(Agrimoney) – That question that Agrimoney.com asked 24 hours ago, about whether wheat futures around their lowest level in a decade have set the bottom, is finding a few answers.
And the consensus opinion does appear to be that prices have passed the nadir, for now at least, even if there is a lack of enthusiastic about futures embarking on a rally.
At Chicago broker RJ O’Brien, Richard Feltes – asking whether the “wheat market, which has trended lower since late July 2012, poised for a rally and if so, by how much?” – noted that “seasonally, wheat tends to top out the third week of July”.
(Such is the interpretation of graphs from Moore Research.)
Sure, there is plenty of talk of ample world supplies, but “wheat bulls may argue that negative news on wheat is fully priced”.
‘Cannot rule out another new low’
Not, it has to be said, that Mr Feltes was optimistic about the greater buoyancy in wheat futures stickling around for long.
“For the short term, wheat may draw additional support from the unwinding of long soybeans/short wheat trade, which has more to go,” he said.
The trouble is longer term the potential for wheat futures feeling a further downdraught from rival grain corn, for which US harvest estimates are increasing as concerns over weather fade.
The seasonal charts also show wheat futures “eroding into September 20 lows”.
“I cannot rule out another new low in wheat into the autumn US row crop harvest, especially if the European Union harvest weather, as expected, improves over the next 10 days, and if August [US Department of Agriculture Wasde] report signals gains in US corn and soybean crops.”
He added: “I suspect the trade is overstating the decline in the EU wheat crop and understating the size of the US corn crop and the North American hard red spring wheat crop,” suspicions which, if proved true, would all “act as a drag” on wheat markets.
‘Done going down for now’
Benson Quinn Commodities flagged the potential support to wheat prices as hedge funds cover a net short in Chicago futures and options which has hit a record high, yet with prices not far from 10-year lows.
“It feels like the wheat markets can post a better correction [upwards] simply due to the lack of interest on the sell side near these levels,” said Benson Quinn Commodities.
It was a view echoed by ag advisory group Water Street Solutions, which said that “there could be at the very least a short-covering rally upon us as funds lighten their extreme short wheat position”.
And., more optimistically, the group added that “large global usage”, with weaker values having priced wheat into feed rations in greater amounts, “and the continual revisions lower in the EU crop should help wheat to have carved out a good long term low.
“While that doesn’t mean the market rockets higher, look for headlines to support short covering rallies.”
“Wheat should be done going down for now,” Water Street Solutions said, if noting some caveats such as the threat to US exports from a stronger dollar, which makes dollar-denominated shipments less competitive.
‘Past seasonal low’
In fact, wheat reverted to reverse gear in early deals on Tuesday, losing 0.7% to $4.26 a bushel in Chicago, for September delivery as of 09:00 UK time (03:00 Chicago time), but remaining – just- above the 10-day moving average regained in the last session.
Ditto Kansas City-traded hard red winter wheat, which fell 0.7% to $4.20 ½ a bushel for September, remaining above its 20-day moving average too.
Amid the decline, Water Street Solutions noted some other positive chart factors, with a “third week in a row higher for Kansas City wheat – you have to go back to November to find the previous event”.
OK, there is a risk that the chart could be showing “a bear flag”, a negative sign for prices.
“But more likely is that we have priced in the bearishness and the seasonal low was scored three weeks ago.”
‘Run out of sellers’
Water Street also remained sanguine amid a drop in Minneapolis spring wheat futures, which for September shed 0.6% to $4.94 ¼ a bushel, saying that “spring wheat seems to have run out of sellers, after testing the lows” on the continuous price chart.
“While the market hasn’t traded higher on the weekly chart, it is consistently closing in the top half of the trading ranges for the last three weeks as co-ordinated selling has been hard to come by here.”
Still, whether that lasts could be down to what the Wheat Quality Council tour of US spring wheat shows when it starts later (lasting until Thursday).
Ami Heesch at CHS Hedging flagged “ideas of a big spring wheat crop lurking in the wings”.
‘More than ample’
A more immediate negative for wheat prices was the data overnight from the USDA on US crop condition which, for all the hype about the US heatwave last week, showed corn rated at 76% “good” or “excellent” as of Sunday.
That was unchanged on the week, and above market expectations of a 1-2 point drop.
“US corn crop conditions came in steady on the previous week and so remains in excellent shape,” said Tobin Gorey at Commonwealth Bank of Australia.
Benson Quinn Commodities said: “Based on crop condition ratings, I would say market is trading at 170-171 bushels per acre corn yield and 47-48 bushels per acre soybean yield,” compared with the 168 bushels per acre and 46.7 bushels per acre respectively forecast by the USDA.
“If realised, both corn and bean balance sheets are more than ample.”
Corn futures fall
RJ O’Brien’s Richard Feltes flagged “more talk of 170+ bushels-per-acre US corn yield, a suggesting a 2.3bn-2.4bn bushel corn carryover for 2016-17, or an 11-year high 16%-17% US corn stocks/use ratio”.
Such dynamics “would signal slippage in December corn futures to $3.20 a bushel or less if realised”.
The contracts in fact stood at $3.40 ¼ a bushel in early deals, a loss of 0.3% on the day, and remaining within sight of the contract low struck last week.
‘Return to drier and warmer conditions’
Soybean futures fared better, adding 0.4% to $9.69 ¾ a bushel for November delivery, as the return of some heat to the US weather outlook provoked some concerns.
(For soybeans, August is the key developmental month for the US crop, with July more crucial for corn.)
“While weather this week looks almost ideal in the Midwest, forecasters are still flagging the potential for a return to drier and warmer conditions next week,” CBA’s Tobin Gorey said.
That said, the US soybean crop is also in rude health, rated at 71% good or excellent as of Sunday, unchanged on the week and 1 point ahead of market expectations.
‘Basis is firm’
Still, soybeans also found support from a strong performance bysoyoil futures, which for December gained 1.1% to 30.28 cents a pound
“Soyoil basis is firm at the [US] Gulf, in part to a couple government vegetable oil tenders this week,” said Terry Reilly at Chicago broker Futures International, including a tender by Egypt’s Gasc authority.
The strength in soyoil was reflected too in futures in rival vegetable oil palm oil in Kuala Lumpur, where the October contract stood up 1.3% at 2,300 ringgit a tonne, regaining its 10-day moving average on a continuous chart.
