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|Wheat futures - will their four-year bear market end in 2017?
By Mike Verdin - Published 09/01/2017
Wheat futures suffered, further, losses in 2016, in the benchmark Chicago market, falling for a fourth successive year, this time by 13.2%.
That landed the contract with its lowest finish to a calendar year since 2005, with prices depressed by a fourth successive season of record world production.
World wheat stocks are poised to end 2016-17 above 250m tonnes for the first time, according to the US Department of Agriculture.
Still, the picture was not universally gloomy. Minneapolis-traded spring wheat gained 9.1%, amid worries over the poor quality of world wheat production, while a poor European harvest curtailed to 3.2% the loss in Paris futures.
London's sterling-denominated wheat futures soared 22% - supported by the devaluation in the pound following the UK's vote to leave the European Union.
Do such signals offer hope to wheat bulls? Or will they curtail the desire among farmers in the likes of Europe to quell output, which would be central to a fundamental turnaround in wheat price fortunes?
Leading analysts give their view.
There is no sign as yet of any major problems when we look ahead to the next season. Official winter wheat acreage figures for the 2017 crop are not yet available everywhere, but Strategie Grains estimated in November that the soft wheat acreage in the European Union is just as large as last year, despite the weak prices.
If so, an increase in production would be on the cards, assuming normal weather conditions, given that EU-wide yields in 2016 fell short of the five-year average by 3.5% as a result of the poor French crop.
According to estimates, the Russian winter wheat acreage for the 2017 crop is around 8-10% up on last year. Conditions have been good so far, which points to another record crop next year.
Overall, there are hardly any apparent risks to the global wheat supply over the next year now.
Accordingly, any noticeable price recovery is unlikely. Although short-term-oriented market participants recently reduced their previously record-high net short positions somewhat, they still appear very sceptical about the future performance of the wheat price.
Prices have been hovering around $4.00 per bushel for more than a year due to high supply worldwide.
Subdued wheat prices are bad news for farmers, making them more likely to focus on building up inventories and less likely to choose to sell.
This might, in turn, cause farmers to plant less acres in the future, which bodes well for the supply outlook [in terms of reducing stocks] and hence for wheat prices going forward.
Prices are expected to pick up over the course of 2017 and average $4.74 per bushel in the October-to-December quarter.
Wheat prices are expected to remain under pressure in 2016-17 at $4.00-4.60 a bushel, after another bumper global harvest and a swelling availability of stocks for export.
Further pressure is projected to emerge from the wider feed grains complex and ongoing strength in the US dollar. However, while our price outlook is slightly underwhelming, the dynamic of this market's fundamentals will be adjusting and could provide opportunities.
We expect an ongoing low price environment to [drive] US planted wheat acres 5% lower year on year to 48m acres. US production is projected to fall below 2bn bushels for the first time in five years.
For the EU, area is expected to be stable, at an estimated 27m hectares, Using trend yield, 2017-18 production will reach 154m tonnes, adding almost 2m tonnes to ending stocks of 13m tonnes.
A recovery in Ukrainian planted area in 2017-18, coupled with projected expansion in Russia, sees the Black Sea region up harvested area for the third consecutive year, to 45.3m hectares, up 2% year on year.
However, we expect a return to Russian trend yield in 2017-18, cutting Black Sea production 8% year on year. This would translate into a 4m-tonne reduction in exports, providing opportunities for alternative origins.
Kansas City [hard red winter wheat] prices regained their premium over Chicago [soft red winter wheat] sooner than we were expecting.
We reiterate our preference for Kansas over Chicago wheat, and expect the former to continue to trade at a premium over the latter.
We expects US farmers to reduce soft red winter wheat acreage by 5% in 2017-18 and hard red winter wheat acreage by 6%, and think farmers will increase hard red spring wheat acreage by 8% due to relatively higher prices on the latter.
Minneapolis [spring] wheat may give up some of its premium over Kansas wheat.
A decline in [winter wheat] acreage in the US would not provide major support to US wheat prices, as
- EU production is likely to recover during 2017-18, as we assume favourable weather in the EU during 2017-18
- a stronger US dollar and a weaker Russian rouble are likely to remain headwinds for US wheat.
University of Illinois
US wheat production increased by 250m bushels in 2016 even as harvested acreage was reduced by 3.4m acres.
Stocks of all classes of US wheat are expected to grow to a 29-year high of 1.14bn bushels by the end of the current marketing year.
A sharp decline in winter wheat production is expected in 2017, reflecting a decline in acreage as well a decline in yield from the record 55.3 bushels per acre of 2016.
Most of the Illinois wheat crop is sold at or shortly after harvest, so the average price received for the 2016 crop will be near $3.90 per bushel. An average near $4.50 per bushel is expected at harvest time in 2017.
Water Street Solutions
We've been waiting for wheat to break above resistance on the chart and it looks like a new year is what it needed.
Dry, cold conditions in US winter wheat areas are adding to production uncertainty - Plains condition reports are dropping quickly - along with the expected drop in 2017 wheat acres.
A 'bull run' is unlikely to be sustained in the wheat market with the ample global supplies - but in the short term, wheat can always demonstrate illogical behaviour.
Watch Chicago opportunities at $4.45 a bushel and if possible $4.90 a bushel.
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