Why have wheat investors got the frighteners?
Soft red winter wheat was by far the worst performer of Chicago’s big three contracts after the US Department of Agriucltur’s key Wasde briefing was released, ending 1.9% lower to put in its weakest finish since Christmas Eve.
And in early trade on Tuesday it found further selling, standing 0.1% lower at $5.41 ¼ a bushel as of 09:45 UK time (03:45 Chicago time).
Exporters vs the rest
Yet it is not as if the Wasde briefing itself was viewed as so negative for Chicago wheat, albeit it was on (Kansas City) hard red winter wheat and, especially, (Minneapolis) spring wheat that the USDA focused its downgrades to the US stocks estimate.
In fact, in Benson Quinn Commodities’ view, for wheat Wasde “changes to US and world balance sheets were viewed as neutral even with world carryout still forecast to be record large for 2019-20 marketing year”.
Sure, the world inventory figure was in fact ahead of market expectations, but that was largely thanks to an upgrade to the figure for China, whose inventories, being unavailable to world markets, are viewed as less importance for pricing.
By contrast, on a more bullish basis, “the ending stock in the eight main exporting countries was revised to 57.97m tonnes against 59.41m tonnes estimated last month”, Agritel noted.
Whether Chicago wheat futures were in the last session leading the market lower “or overreacting is hard to decipher – perhaps it is a little of both”, said Tobin Gorey at Commonwealth Bank of Australia.
“Chicago price got more out of the rally from October last year” than other wheat contracts, “so perhaps they have more to give up now”.
And, after all, there were some other stories in town other than the Wasde, which questioned whether the gains in Chicago had not gone too far.
ADM Investor Services flagged pressure on prices of soft red winter wheat in particular from “talk commercials may be shipping spring wheat to Chicago for delivery”.
That is taking advantage of Chicago wheat’s highly unusual premium over its higher-protein Minneapolis peer, which has in essence introduced a milling wheat discount.
‘Competition appeared to be tougher’
Then, for US wheat as a whole, there was the negative that Romania and Russia shared the spoils (360,000 tonnes) in the latest Gasc tender, signalling that the Black Sea exporters are back in the running for real.
“Competition appeared to be tougher with the Black Sea origins,” said Agritel, adding that the region’s wheat export prices “have declined in the last two weeks”.
ADM Investor Services said the result “offered resistance” to gains in US futures.
(Agritel signalled that for Paris prices the result may not be disastrous as “exports from France remain strong towards other destinations, that’s why the country was not particularly aggressive” in the Gasc tender.)
On top of this, there is the overarching concern that funds, usually happy to be net short in Chicago wheat futures and options, are net long, offering scope for significant selling.
Since the Wasde, “funds, unusually long on wheat, have sold many lots,” Agritel said.
Terry Reilly at Futures International added that “we believe unwinding of wheat-corn spreads are pressuring wheat prices despite the 25m-bushel reduction in USDA US ending corn stocks” estimate in the Wasde”.
Not that this was in early deals helping corn futures themselves, which stood down 0.2% at $3.79 a bushel in Chicago for March.
Indeed, Richard Feltes at RJ O’Brien took a view towards what may be in store later in the year, which could be bearish across the board.
For Chicago markets, the “challenge in coming months will be to ascertain whether the prospect for a sizeable rebound in 2020 US corn and soybean production will be offset by sharp rebound in Chinese buying of US ag commodities.
“I suspect some segments of market - especially farmers and to a lesser extent end users - are over-emphasising the ramped-up demand portion of the phase one China-US trade deal, while downplaying impact of prospect for 2020 corn and soybean production gains over 2019 of 1.7bn bushels and 0.6bn bushels respectively.
“Large managed fund wheat longs are vulnerable, while shorts in corn and soy have no reason to blow unless the 2020 US Midwest spring looks unfavourably wet.”
‘Very conservative stance’
Certainly, bears held the whip hand in the soybean market too in early deals, when the Chicago March contract eased by 0.1% to $8.83 ½ a bushel.
Sure, the USDA did in the Wasde raise by 3.0m tonnes its forecast for Chinese soybean imports in 2018-19
But “key now is when/if China buys US soybeans over record 2020 South America supplies”, said ADM Investor Services.
It added that “Brazil soybean export prices are cheaper to China than US” offers.
Benson Quinn Commodities said that the USDA overall in the Wasde “took a very conservative stance on China demand”.
But that is what the market will have to live with until evidence emerges to suggest a different approach.