Trade deal, interest rates only potential volatility for rangebound wheat

Oversupply and predictable demand will mean wheat prices remain rangebound over the coming months, with a panel of traders flagging only the outcomes of the China-US trade deal or a surprise change in interest rates as potential drivers of volatility for the market.

“I think the big theme in our industry is overcapacity. There are low interest rates and no real barrier to entry,” said Bas van Hoorn, Global Trading Manager, Grains Department at Glencore Agriculture at the IAOM Middle East and Africa conference in Dubai on Monday.

“We talk about the growth in consumption, but we see a disparity where the growth in capacity has grown much quicker,” van Hoorn said.

Despite recent global production cuts, the USDA still expects a record-breaking 765 million mt crop this year – up nearly 5% year-on-year – while demand is set to rise around 3% year-on-year to 755 million mt.

That has left the benchmark Chicago wheat contract stuck in a narrow 80 cent/bu trading range since the start of the 2019/20 marketing year on July 1, equivalent to around 15% of the current price.

“Every 120 days we have a new crop, so it’s only ever short-term issues for the wheat market… Prices are short-term bullish but there’s a good supply,” said Don Campbell, General Manager International at Graincorp.

With market fundamentals well understood and the likelihood of a demand-driven shock downplayed, the panel was left to flag outliers as potential sources of volatility.

“An agreement between China and the US is still the number one thing to watch for the fundamentals… Wheat is much less liquid than wheat or corn, which is why it tends to move a bit more,” said Michel Meyer, Middle East and Africa Manager – Grains and Oilseeds at Cargill.

Rumours that China is in the market to buy US wheat have persisted in recent weeks as Beijing and Washington look to hammer out a trade agreement that will chip away at a $40 billion trade imbalance between the two countries.

“If, for some reason – which I doubt – (China) buy[s] US wheat, that would be a game-changer,” van Hoorn said.

Another outlier that could spring a surprise would be any change in historically low – or even negative – interest rates, the panel said.

Cheap credit has driven the growth of on-farm storage, shifting power dynamics in the grain trading business as producers feel financially comfortable and able to hold on to their annual output for longer.

“There’s more and more on farm storage but if interest rates go up, the cost of carry will grow and that will have an effect on the spreads and will change the flat price,” van Hoorn said.