Wheat price surges as dry weather cuts global output

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group
Ole Hansen joined Saxo in 2008 and has been Head of Commodity Strategy since 2010. He focuses on delivering strategies and analyses of the global commodity markets defined by fundamentals, market sentiment and technical developments.

The global grain market has increasingly been turning its attention away from the potential negative impact of trade wars and raised tariffs to the outlook for a tightening market. Dry weather conditions across several key growing regions, especially outside the US, continues to drive down forecasts for the 2018 world harvest.

According to NOAA, the US scientific agency that monitors weather and atmospheric conditions, 2017 was the third hottest year on record globally, only exceeded by 2015 and 2016. The current outlook for 2018 could indicate that records might be broken again with several monthly records having been recorded so far this year. These developments helped provide US-traded grains and soybeans futures to a strong start off of the year before trade wars and tariffs helped send the sector, led by soybeans, sharply lower.

A recovery now seems to be underway, led by wheat, with multiple important growing regions from Europe and the Black Sea region to Australia all reporting challenging conditions due to drought. In Denmark, where we are located, the last major rainfall occurred back in April and since then bone dry conditions have created the worst conditions for farmers in decades. The lack of rain across Europe has turned normal green grazing fields into something that resembles sandy beaches. As a result of this farmers have been forced to dig into their winter feed stocks in order to keep their livestock alive and this development is currently driving wheat prices higher with buyers looking to cover/hedge their winter requirements.

The European wheat market, represented in the charts below by the September Paris milling wheat future, trades above €200/MT for the first time in three years. It has been supported by the mentioned buying, together with the fundamental support from further crop downgrades within Europe and now also talk that Russia may introduce export curbs to prevent domestic bread prices from rising. The London feed wheat contract, meanwhile, reached a fresh five-year high after rallying by 9% during the past week.

In Chicago the soft red winter wheat caught a bid on the developing panic in Europe. The contract for September delivery (ZWU8) at one stage yesterday rose by the maximum allowed by the exchange for the session when it hit $5.4525/bushel before ending up 6.2% at $5.42/bushel.

Source: Saxo Bank

The rise in wheat also helped support Chicago corn futures with the most-traded December contract edging towards resistance at $3.8050/bushel, a level which represents the 38.2% retracement of the May to July sell-off.

Soybeans, which lost 22% between May 29 and July 16 after getting caught up in the trade war between the US and China, failed to join the rally yesterday. This happened despite Trump announcing a $12 billion aid package to US farmers. The market interpreted this as a sign that the current trade dispute could last for a prolonged period of time with the US in no mood to seek a deal with the Chinese. However, the jump overnight occurred after a meeting between President Trump and EU’s Jean-Claude Juncker resulted in Europe agreeing to lower trade barriers for US-produced soybeans. The extra amount that Europe can buy, however, is dwarfed by the impact of lower demand from China after the country in a retaliatory measure imposed an additional 25% tariff on American soy imports.

Hedge funds, just like most other traders, have been left frustrated by the volatility seen across the grain and soybean markets so far this year. A troubled beginning to the year supported a record buying spree of nearly 900,000 lots between January and March with corn and soybeans seeing most of the demand. The emerging trade war reversed the direction of the market and forced speculative traders out of their recently established longs.

In the week to July 17 funds held a neutral position in wheat (4k lots) while maintaining net-short positions in corn (-129k lots) and soybeans (-58k lots).

Access both platforms from your single Saxo account.

Disclaimer

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice or a personal recommendation and does not take into consideration your objectives, financial situation and needs. Saxo Capital Markets UK Limited will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information. We assume no liability for errors, inaccuracies or omissions contained within these materials.

It is important that you understand that with investments, your capital is at risk. We offer leveraged products which carry risk and can result in losses that exceed deposits. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more here.

Additional Key Information Documents are available in our trading platform.

Saxo Capital Markets UK is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871

Please read our full disclaimer - https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer