U.S. winter wheat futures have languished near their lowest levels in more than a year following a healthy start to the young U.S. winter wheat crop and a general easing in global supply balances due to strong production in Canada, the EU and elsewhere.
But strong import demand in such places as China and Egypt lifted EU wheat values to near a seven-month high last week in what could be a sign that the global wheat market is finally primed for a recovery as focus shifts to demand from supply.
Too much focus on U.S. factors
In recent months U.S. grain traders have been looking at an array of U.S.-centric market barometers for signs on wheat price direction.
Throughout the past summer, updates on the scope and health of U.S. spring wheat production were closely tracked alongside updates on cash price dynamics across a number of major U.S. demand locations.
In addition, changes to U.S. supply-and-demand forecasts were monitored in monthly crop updates from the U.S. Department of Agriculture.
This mix of information seemed to justify the broad downturn in wheat values for most of 2013 to date. An exception was in October, when wheat briefly bounced higher as a sudden surge in U.S. export business caught several short-biased traders by surprise.
Even the late-October pullback in prices made sense as U.S. export sales dropped off just as winter wheat sowings were completed in a timely fashion amid broadly friendly field conditions.
But the recent upturn in European wheat values reveals that traders now need to start looking further afield for guidance on wheat price potential, especially now that the U.S. supply-side story is starting to wind down and overall market focus is shifting to overall demand potential.
Europe leading the way, but…
Europe, due to its status as one of the world’s largest wheat growers, as well as its location on the doorstep of major wheat consumers in North Africa and the Middle East, has been widely expected to take centre stage in global wheat trade for the next several months.
It also has been widely expected that the relative abundance of wheat from the region — production is projected at its highest level in five years — would act as a weight on prices for the foreseeable future as traders struggled to off-load excess supplies to choosy buyers.
But instead of heading lower, European wheat values have pushed higher in recent weeks as a combination of robust importer demand and a clogged logistical supply chain throughout France and other export locations pressured buyers to lift their bids in order to secure supplies.
The result has been a widening in the price spread between benchmark European (MATIF) wheat futures and Kansas City hard red winter wheat futures to more than $25 per tonne from around $5 at the beginning of November.
This is the widest premium for MATIF wheat over Kansas wheat since the midst of the 2013 U.S. winter wheat harvest in late spring, and reveals how urgent the current consumer demand is for grain supplies.
But more importantly, this differential is now close to the cost of shipping grain from the U.S. to North Africa, and so renders U.S. prices highly competitive relative to European supplies even though E.U. exporters are located far closer to many of the world’s top end-users.
If the MATIF wheat premium relative to Kansas wheat proves to be sustainable for more than a few days, consumers will likely turn to the United States for supplies they are unable to pull out of the E.U.
And this in turn could prove to be the trigger for a more enduring rally in U.S. wheat prices than has been seen of late.