ANALYSIS: Weather, weakening dollar lift wheat from bottom

US wheat futures are rallying, with the trade starting to fret that the market may have been oversold as weather-related woes assail the EU’s crop, global balance sheets look tighter, and a period of dollar weakness looms.

Coming just a week after prices bottomed in the wake of a bearish May Wasde report from the USDA, the trade has since struck a decidedly more cautious tone as heat and dryness have persisted across northwest Europe.

That was the catalyst for a US futures rally on Thursday, with July HRW up almost 4% on the day, peaking at a two-week high of $4.6825/bu before closing 2.7% higher at $4.64/bu while SRW followed.

Prices had ticked another half-point higher on Friday morning.

Seasonal charts show Chicago and Kansas futures typically falling through to the end of June as the new crop starts to hit bins across the US, but for now it looks as though the bulls could have the upper hand.

Weather

On the cusp of June, it makes sense that the trade is watching weather charts so closely.

In the US, rains have fallen across SRW-growing regions with forecasts for warm, dry weather over the coming week.

But large parts of the HRW-growing belt have struggled from a lack of water, with western Kansas already a cause for concern and with no let-up in sight – hence the discount to SRW narrowing over the week.

Globally, there are plenty of still unknown variables as crop development enters its final stages, with results still far from a foregone conclusion.

On the Black Sea, recent rains in Ukraine and Russia have only partially allayed fears of losses and continue to stir debate, while Romanian yield losses mean the crop is already set to come in lower than last year despite planting more.

The spring wheat crop in Siberia remains extremely dry, although it still has a long way to go.

But it seems to be the situation in northwest Europe that is grabbing the most attention for now, with crop downgrades across the region and little-to-no rain forecast for the next week in France, northern Germany, or the UK.

That was reflected in European Commission data Thursday, where it trimmed another 4.3 million mt from its output estimate to 121.5 million mt, while exports were cut 1.5 million mt to 26.5 million mt.

Balance

Although the headline figures in the May Wasde report show the planet likely heading for another year of record-breaking wheat output, the devil was in the detail.

Global output was called 1% higher year-on-year at 768.5 million mt, but the major northern hemisphere producers – responsible for the bulk of the planet’s wheat exports – are set to have a smaller crop than last year.

The USDA has estimated combined output in the EU, Russia, the US, Canada, and Ukraine 6% lower than last year at 322.8 million mt, and in private some think that this figure is already too optimistic.

The southern hemisphere is set to rebound almost a third as Australian production reverts to the mean, but that represents a combined 45 million mt and is still six months away at the very least.

“If we take out China and India from the balance, I feel we could go to a stocks-to-use ratio close to 2012, and hence there’s more upside to the wheat price,” broker Gert Bosscher of Copenhagen Merchants said on a Global Grain panel Friday.

That analysis was supported by the International Grains Council (IGC), which released its monthly supply and demand report this week and noted Russia and the EU were set for markedly smaller output come harvest.

FX factor

Macroeconomic shifts are also playing a role in the moves, with currency a big factor to watch as parts of the world start to show tentative signs of re-emerging from coronavirus lockdowns.

The dollar index, a measure of the US currency against a basket of other major currencies, is at its lowest level since mid-March when it rallied as investors sought haven at the height of Covid-19 economic panic.

Commodity prices ostensibly rise as the US currency weakens against its rivals, spurring demand in the US cash market as its cargoes appear cheaper and, in turn, lifting the exchange price as buyers rush into where they see value.

“The lower USD is helping US exports, adding to the bullishness,” broker Terry Reilly of Futures International said in a client note Thursday.

So, why is the dollar weaker?

US economic data showing tentatively positive signs have calmed nerves elsewhere, given its de facto global reserve status, and encouraged capital outflows to other parts of the world’s economy.

Potential spillover from the latest round of hostility between Washington and Beijing is hardly helping matters either, apparently tempering risk appetite in the US everywhere bar equities.

The euro, meanwhile, has soared almost 2% over the course of the week to a two-month high of 1.114 to the dollar after Brussels sketched out details of a €750 billion coronavirus bailout fund.

While the outline of the agreement is just that – still requiring unanimous approval of all 27 member states before becoming reality – the mood in Europe is decidedly in risk-on territory at the moment, with indices up and debt yields down as a fiscal union looks more likely than ever before.

That may, at least partially, explain what has happened to the European wheat benchmark, with the September contract up just 0.4% by Thursday’s close to €187.25/mt and currently facing a loss over the week.

Emerging markets may still look like risky bets to some, but the ruble has climbed over 15% against the dollar since hitting a lockdown low at 82.863 in mid-March.

And that is squeezing trade margins in the world’s biggest wheat exporter, making sales decidedly less attractive.

Wildcards

But beyond the supply side of the business, demand has taken on a life of its own this year for the agriculture market and threatens to act as a dampener for an indefinite period.

Typically the less interesting side of the equation, quarantine measures, and faltering economies have left analysts scrambling to readjust consumption assumptions that – on a lazy day – are often left increasing as a function of population growth.

But with the threat of lower incomes, restaurants and hotels closed, leisure and business travel a hazy memory, and social distancing measures likely to have a lasting impact on the way day-to-day lives are lived, it will take time to understand what exactly the new normal is.

Parts of North Africa have struggled with their local crops and will no doubt need more wheat than they did last year, but tenders have been delayed as so many questions remain unanswered over the size of this year’s crop.

Add to that a bonanza of cheap corn and a knock to biofuels consumption and the problem gets even more complex for the feed side of the wheat industry.

Where we go from here largely depends on what shape you think the recovery curve is going to be and how long it will take to come off this hiatus.