Wheat rally lacks legs and will fizzle in the face of rising supply

U.S. wheat exports are running at their fastest pace in years but predictions of a sustained price rally are overblown

Reuters / The recent uptick in U.S. wheat exports has convinced some traders that prices will buck their recent downward trend and go higher over the coming months.

But while firm overseas demand, coupled with the conclusion of the U.S. winter wheat harvest, might well offer support to prices going forward, stiff competition from other exporters such as Canada, Australia and Ukraine will likely limit the potential for higher prices over the near to medium term.

So far, U.S. wheat exports are running at their fastest pace in years, and are on course to hit USDA’s forecast of close to 30 million tonnes for the 2013/14 crop year.

Wheat inspections data, an indicator of upcoming sales intentions, are bullish, and with China the most prominent destination in the latest inspections report, market sentiment has been buoyed further, given China’s heretofore limited interest in U.S. wheat.

Indeed, year-to-date U.S. wheat exports to China are already at their highest level in a decade, and now look set to rise further. And with the price spread between U.S. wheat and Chinese domestic wheat at three-year highs, additional Chinese imports are all but guaranteed.

Heightened competition

The problem for bullish U.S. wheat traders is that, while China might buy more wheat, the share bought from U.S. suppliers will likely decline as wheat from other origins becomes available.

Canada, Australia, Russia, Ukraine and Kazakhstan are all expected to harvest significantly larger wheat crops this year, and India has historically high domestic wheat reserves earmarked for export.

Finally, Southern hemisphere growers such as Argentina and Australia are also forecast to increase exports over last year, ensuring that a healthy dose of competition will likely define wheat exports in the coming months.

For grain-hungry importers such as China, the combination of abundant new supplies and low prices is almost irresistible, especially when domestic wheat values keep rising on brisk volume and higher open interest — trading patterns that are the hallmarks of a commercial scramble.

But the window for U.S. exclusivity will start to close in a matter of weeks as Canadian and then Australian supplies come on stream. High prices will also bring wheat from India, Europe and the Black Sea and any rally is likely to be quickly snuffed out.

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