Reuters / March 2014 Chicago wheat futures started out the 2013 calendar year above $8 a bushel but appear set to end the year struggling to hold above the $6 level.

A global pickup in importer demand during late summer had allowed for a brief stint of price strength in early autumn, but the revelation — amid a strong U.S. crop harvest and massive crop plantings across South America — that global grain supplies will likely rise to record levels in 2013-14 served to yank wheat values lower again as the year wound down.

Heightened supply competition from other crops coupled with the real potential for U.S. winter wheat supplies to prove even larger than currently anticipated are likely to cap wheat values for the near term at least, and could well drive prices even lower into the new year.

From famine to feast

The chief driver of the wheat market meltdown over the past year or so has been the steep rebound in global grain supplies from the drought-stunted levels of 2012 to record abundance in 2013.

Combined U.S. grain production jumped by more than 80 million tonnes or just over 23 per cent in 2013-14 over 2012-13 levels.

Grain inventories swelled by an even greater degree over the same period, expanding by 50 per cent from around 42 million tonnes to close to 63 million tonnes.

This upswing in supplies naturally had a negative impact on grain values, with corn prices down around 45 per cent from their mid-July 2012 peak. Wheat prices have lost around 30 per cent over the same time frame as consumers and speculators alike pared back their buying interest and allowed for the waves of fresh supplies to steer prices lower.

At a global level, grain supplies have also climbed over the past year or so, though not to the aggressive extent seen in the U.S.

This U.S.-centric grain supply glut has been the main factor weighing on wheat prices lately, and stands to be the chief bar to upside progress in wheat values over the near to medium term.

More specifically, it is the large supply of corn in the U.S. lately that stands to weigh on wheat prices in the short run, as corn is expected to displace wheat in feed rations throughout the coming months and lead to a further build in domestic wheat inventories.

Crowded field

A saturated wheat export market will do little to alleviate any U.S. surplus either. Exporters in the European Union, Black Sea region, Australia and Canada are all expected to move to protect or gain market share around the world in 2014 following large crop hauls in each of those areas.

Congested ports and grain-handling facilities in Canada, France and elsewhere have pushed wheat export values higher in those regions lately, offering U.S. exporters a chance to step in to fill any resulting supply void.

But the limited U.S. export business conducted in recent weeks suggests consumers are not in too much of a hurry to compete for fresh supplies, and are potentially content to wait for the logistics backlog to clear in their preferred origins.

At the very least, the rather subdued demand pace for U.S. supplies even as export prices rose elsewhere suggests that consumers remain price sensitive even in the face of delays to shipments, and expect U.S. suppliers to offer attractive terms on sales in order to win the deal.

That said, the weakening trend in U.S. wheat export prices relative to France and other regions does indicate that grain handlers and exporters are attempting to generate additional demand. But with Canadian feed wheat trading at a more than $30-$40 per tonne discount to U.S. soft red out of the U.S. Gulf, it is clear that U.S. exporters have not yet felt compelled to aggressively slash offer prices in order to ship extra grain.

Big crops getting bigger

U.S. exporters may be waiting to get a better handle on the scale of the emerging U.S. winter wheat crops before they reduce wheat sale prices any further. The crops across the southern Midwest and U.S. Plains recently entered their dormancy period amid generally good health and across a large expanse of acres.

Indeed, winter wheat-planted area in the U.S. hit a four-year high in 2013, and in terms of quality entered the winter dormancy period with its highest overall rating since 2009-10.

Further, weather conditions during the critical early development phase were close to ideal in key locations such as central Kansas, where soil moisture levels climbed thanks to above-normal rainfall in September and October to provide the crop with yield-enhancing moisture reserves at the start of the growing season.

Similarly, conducive crop conditions were evident across Colorado, Oklahoma and Texas, suggesting that if the remainder of the growing season pans out amid normal conditions, the overall U.S. winter wheat crop could well surpass current projections in terms of scale and quality.

Taking cover

While the steady erosion in wheat values over the past several weeks has been the clearest indicator of bearish attitudes in the market, the recent climb in bearish option purchases has been another signal that many traders anticipate prices to weaken even further in the weeks ahead.

Just within the month of December, open positions at the $6-per-bushel strike price in March 2014 Chicago wheat puts has increased by more than 30 per cent, revealing that a growing number of traders expect March wheat prices to slump well below that level early in the new year.

Since Chicago March wheat futures have not slipped below that price since early 2012 — and then for only a very limited time — this large placement of bets that 2014 values will descend well below there is a clear warning that more weakness could well be in store for this market over the coming months.