Wheat: A Developing Story

Wheat so far has managed to dodge the onslaught of the driest summer in the US — why? —  simply because it is a winter crop unlike corn and soybeans. Close to 75% of the total wheat production in the US is classed as winter wheat. It is sown in the September-October period and harvested by July. 70% of the production is related to weather so it stands to reason that if we have a volatile weather this will affect yield. In corn and soybeans we have seen close to 50% gains in the commodity as a result of volatile weather. However, so far the market has been reluctant to price the same in wheat. The main reason for this is that it is not yet visual. As we come to an end of the corn harvest, wheat is sown and at this time we see the seedlings starting to sprout, at this stage of their development they requires sufficient rain to tap into the subsoil moisture before going dormant for the winter. Here lies one of the problems, the winter crop like the corn crop has been essentially planted on low soil moisture profiles. If no rain occurs at this stage then the plants' ability for strong growth is undermined. Yields will be low. The drought in the US is still with us, it has not broken, subsoil moisture is low. 71% of the current winter wheat fields remain in drought and with this year's winter weather outlook tipped to be similar to last year's the ensuing lack of moisture will present a problem for production. The crop needs rains and it needs them now. The US is the largest exporter of wheat, selling 35.4 million tons. Its closest rivals are France at 19.2m, Canada at 17.5m then Australia at 13.5m. 

Ordinarily, the world can cope with poor harvests in one place or the other; however, with world ending stocks already tipped to be lower by 10% this year further weather disturbances are likely to put further crimps on supply. This is already happening in the global wheat markets. In the Ukraine the government announced that it did not have sufficient wheat for exports. The Ukraine is the 6^thlargest exporter of wheat and closed its doors for sales. We can sense that Russia, which is the 8^th largest exporter, is already experiencing supply tightness and many are suggesting that it too will close supply to the global market. Then we have Australia, which as mentioned is the fourth largest exporter of the commodity, and is anticipated to report a 25% drop in WA production due to dry conditions. Add to the fact that the current US crop is at its worst condition since 1985 then the issue is becoming real and needs to be monitored.

Is there potential for a food crisis similar to that of 2007-8? This is the question that needs to be answered. If a 15% fall in the production of corn in 2012 in the US is responsible for 50% gain in the price then the potential for wheat to go beyond US10.00 and even US12.00 a bushel given the current scenario is real. One of the gauges we focus on in the agricultural markets is the stock-to-use ratio. This ratio is an important predicative tool that we use to gauge movements in the wheat market. Basically it’s a reading of grain supply minus consumption divided by consumption. In 2007-8 the ratio dipped to 19.6% and this sparked a rally that saw prices move from US500 to US1250. The current reading is 24.6% and with production down already and looking to go lower the vulnerability of further tightness in wheat market is real, so if rains do not come we can expect a move higher. This is why we are seeing prices tracking sideways totally ignoring the machinations of the geopolitical environments and purely focused on demand and supply. It is just a waiting game at the moment and the market is cautious.

Technically, as mentioned at the beginning of this Special Report, it has been remarkable to see the price action. The nervousness in the market is clearly defined by the price action. We have seen large moves in the soybean and corn complexes however wheat it has just tracked sideways. This type of formation is typical of markets that are getting ready for a large move to the topside. It is very hard to trade via momentum indicators and these should be ignored for the time being. The key to this move is trading the break to the topside. Trying to pick the low just doesn’t work. At the moment the top-line trend resistance comes in at US890 then US920, so if we get a daily break above these levels then we can suggest that the move is on.