Wheat Market Update
The wheat market has bottomed for now and is moving into a sideways trading pattern. The main influences for the near-term are money flow, corn, and weather.
There is the potential for wheat supplies to end up tighter than current estimates as 2023 unfolds. However, wheat will struggle to shrug off global economic uncertainty and bearish outside markets. It looks like the downtrend has stalled for now, and that prices will drift sideways until new information surfaces.
Let’s look at recent developments and how they are influencing wheat prices currently.
Money Flow
The risk of further bank runs is bearish to U.S. equities first, due to the potential domino effect; and to interest rate projections second, as bank defaults are deflationary. Much remains uncertain about the true extent of global banking challenges. Depending on the severity, it could eventually translate into speculative buying in commodities like wheat.
Investors bailing on equities and bonds seeking safer assets might turn to energy markets first, because they have tanked lately too. But if fertilizer is any indication, energies could fall further than anyone would predict. Energy futures are also relatively vulnerable to a recession and easing inflation - grains are generally more resilient to macroeconomic factors.
The funds are said to be short wheat, and still long corn. The global over-supply situation is greater for corn than wheat. New speculative buying would likely land in Chicago futures over the other two less liquid wheat contracts. These dynamics are shifting the inter-market spreads.
Corn
Corn export sales are accelerating as recent price declines have made U.S.-origin the cheapest, and one of the only sources for global buyers for the next few months. Like wheat, corn could be construed as a relatively safe haven for institutional investors fleeing bond and equity markets. The old/new-crop inverse is widening currently.
Corn’s tie-in to energy markets would seem to cut both ways. On the one hand, domestic ethanol processing capacity provides a stalwart outlet for the U.S. crop. On the other hand, energy prices are weak and could see further downside.
Longer term, the outlook for grain-based ethanol demand appears precarious based on looming reporting requirements for full life cycle analysis of environmental impacts in production agriculture. Corn is a heavy user of nitrogen fertilizer and N represents the majority of greenhouse gas (GHG) emissions in food supply chains.
In terms of its influence on the wheat market, corn looks like a temporarily supportive influence at best. Traders report that:
Both corn and wheat markets quickly priced in recent news,
Even more bullish fundamental news wouldn’t spark a rally, and
Additional developments are needed to stem further declines.
Current strength in corn futures looks like a bear market rally.
Wheat Cash Markets
Last week, cash milling wheat prices were approaching feed wheat values in some areas. Corn’s recent devaluation does weigh on feed wheat as they are substitute ingredients, but the cash price realignment has a lag. For now feed wheat values should form a floor to Canadian milling wheat values.
Canadian wheat exporters aren’t thrilled to be shipping at near-negative margins, but they kinda have to keep at it. There are big supplies of wheat in the country, and new handling facilities to turn.
Grain companies remain short. Demand for Canadian wheat is strong at current price levels, but that won’t spark a rally. Market focus is turning to the weather, and money flows will be reactive.
Looking Ahead
Grain production in Ukraine this season is expected to face significantly worse challenges, on top of last year’s, and world government estimates aren’t yet reflecting this.
Dryness across several regions (India, North America, Argentina) could impact production but it is too early for a weather rally.
Most weather rallies are short-lived. In the case of wheat, further upside will be capped by the long-term outlook for corn supplies to balloon.
It could be multiple years before a shortage of wheat develops. Ending stocks have rebuilt from 2021/2022, and 2023 wheat plantings are going to be up sharply in Canada.
With the U.S. crop coming out of dormancy, heading is around the corner, making soil moisture conditions critical. Drought conditions will be watched closely.
Market sentiment is following macroeconomic money flows and the weather, more so than government supply and demand reports.