As the wheat market in currently experiencing high volatility, We feels an update on the wheat market is needed.
The January WASDE report was slightly bearish, as global ending stocks were raised by 1.8MMT which loosened major exporters stocks-to-use from a record tight 12.1% to 13.33%. The USDA also increased US winter wheat acres higher than expected, esti- mating an increase of 740k year-on-year. This led to weakness on US wheat futures directly following the release of the Jan WASDE and medium-term lows were tested. However, support held, and the market has since rebounded strong amid concerns over potential Russia-Ukraine conflict, dry/cold weather across US winter wheat regions and corn production losses from South America.
Whilst we live in a backdrop of near record tight major exporter stocks-to-use and unfavourable US/South American weather is still a real concern, the markets main focus is the potential con- flict between Russia and Ukraine. Russia-Ukraine tensions have been building for some time, with Russian troops continuing to amass at the Ukraine border. Russia issued a list of demands, including guarantees that NATO would not expand further in Rus- sia’s former Soviet state and the US would not deploy new mili- tary bases in former Soviet Union territory – whilst the US reject- ed the demand of ceasing the expansion of NATO they did leave the door open to discussions on not deploying new military ba- ses. The US Secretary of State seeks to meet with the Russian Foreign Minister this Friday to “find a diplomatic off ramp†and avoid warfare between Russia and Ukraine.
Global markets are currently building in a risk premium cater for escalating Russia-Ukraine conflict. The Black Sea region ac- counts for just over one third of global trade, and importers are relying on Russian/Ukraine shipments over the next 6 month to the tune of 17-19MMT. With major exporter ‘stocks-to-use’
still extremely tight, a disruption of the Black Sea supply chain would have severe ramifications. Back in early 2014, when the initial conflicts between Russia and Ukraine kicked off, traders were posed with a similar co- nundrum regarding Black Sea wheat supply. Under these circumstances, the market priced in a large risk premium which ultimately saw US wheat futures rally over 160USc/ bu (30%) from Feb-2014 to April-2014. Despite thousands of casualties due to the 2014 conflict, it ultimately didn’t affect shipments from western Ukraine ports and the risk premium started to erode from the market in May 2014.
With the world now facing a similar situation, the question many pundits’ lips: will futures rally to the same degree as
seen in early 2014? An important factor to keep in mind is the wheat balance sheet back in 2014 wasn’t nearly as tight as it is now. Back then, the major exporter ‘stocks-to-use’ was around 18%, compared to current stocks which are near record at 13.3%. As a result, any current disruption could potentially be more amplified compared to 2014, that said the world is getting used to operating at these tight stock levels. An example of this can be seen when comparing the 2008 wheat rally (which reached over 1300USc/bu) to the rally seen in 2021 (which reached only 875USc/bu) despite major exporter stocks-to-use being tighter in 2021. With this in mind, We would not be surprised for wheat futures to test recent contract highs if Russia does decide to invade Ukraine and exports are impeded.
The chances of a Russian invasion into Ukraine are building, with US president Biden indicating that a partial incursion could be expected in the near term, as Russia isn’t known for backing down. We’re waiting to see if the US Secretary of State can reach a diplomatic solution with Russia this Friday.
Wheat markets over the last 12 months have been incredibly volatile, torn between extremely tight stocks and one weather event to the next. We continue to monitor this recent strength for an opportunity to increase sales once we feel this rally has run its course. It is of benefit that the current rally is also coinciding with the normal season strength we tend to see into early Feb/March as the Northern Hemisphere crops begins to emerge from dormancy. Whilst the current geopolitical tensions isn’t the only bullish card in support of this market, however, if the market does find comfort that some resolution between Rus- sia and Ukraine can be found, an expected pullback can be forth- coming.
Cheers guys
The January WASDE report was slightly bearish, as global ending stocks were raised by 1.8MMT which loosened major exporters stocks-to-use from a record tight 12.1% to 13.33%. The USDA also increased US winter wheat acres higher than expected, esti- mating an increase of 740k year-on-year. This led to weakness on US wheat futures directly following the release of the Jan WASDE and medium-term lows were tested. However, support held, and the market has since rebounded strong amid concerns over potential Russia-Ukraine conflict, dry/cold weather across US winter wheat regions and corn production losses from South America.
Whilst we live in a backdrop of near record tight major exporter stocks-to-use and unfavourable US/South American weather is still a real concern, the markets main focus is the potential con- flict between Russia and Ukraine. Russia-Ukraine tensions have been building for some time, with Russian troops continuing to amass at the Ukraine border. Russia issued a list of demands, including guarantees that NATO would not expand further in Rus- sia’s former Soviet state and the US would not deploy new mili- tary bases in former Soviet Union territory – whilst the US reject- ed the demand of ceasing the expansion of NATO they did leave the door open to discussions on not deploying new military ba- ses. The US Secretary of State seeks to meet with the Russian Foreign Minister this Friday to “find a diplomatic off ramp†and avoid warfare between Russia and Ukraine.
Global markets are currently building in a risk premium cater for escalating Russia-Ukraine conflict. The Black Sea region ac- counts for just over one third of global trade, and importers are relying on Russian/Ukraine shipments over the next 6 month to the tune of 17-19MMT. With major exporter ‘stocks-to-use’
still extremely tight, a disruption of the Black Sea supply chain would have severe ramifications. Back in early 2014, when the initial conflicts between Russia and Ukraine kicked off, traders were posed with a similar co- nundrum regarding Black Sea wheat supply. Under these circumstances, the market priced in a large risk premium which ultimately saw US wheat futures rally over 160USc/ bu (30%) from Feb-2014 to April-2014. Despite thousands of casualties due to the 2014 conflict, it ultimately didn’t affect shipments from western Ukraine ports and the risk premium started to erode from the market in May 2014.
With the world now facing a similar situation, the question many pundits’ lips: will futures rally to the same degree as
seen in early 2014? An important factor to keep in mind is the wheat balance sheet back in 2014 wasn’t nearly as tight as it is now. Back then, the major exporter ‘stocks-to-use’ was around 18%, compared to current stocks which are near record at 13.3%. As a result, any current disruption could potentially be more amplified compared to 2014, that said the world is getting used to operating at these tight stock levels. An example of this can be seen when comparing the 2008 wheat rally (which reached over 1300USc/bu) to the rally seen in 2021 (which reached only 875USc/bu) despite major exporter stocks-to-use being tighter in 2021. With this in mind, We would not be surprised for wheat futures to test recent contract highs if Russia does decide to invade Ukraine and exports are impeded.
The chances of a Russian invasion into Ukraine are building, with US president Biden indicating that a partial incursion could be expected in the near term, as Russia isn’t known for backing down. We’re waiting to see if the US Secretary of State can reach a diplomatic solution with Russia this Friday.
Wheat markets over the last 12 months have been incredibly volatile, torn between extremely tight stocks and one weather event to the next. We continue to monitor this recent strength for an opportunity to increase sales once we feel this rally has run its course. It is of benefit that the current rally is also coinciding with the normal season strength we tend to see into early Feb/March as the Northern Hemisphere crops begins to emerge from dormancy. Whilst the current geopolitical tensions isn’t the only bullish card in support of this market, however, if the market does find comfort that some resolution between Rus- sia and Ukraine can be found, an expected pullback can be forth- coming.
Cheers guys
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