By John DePutter & Dave Milne – June 5, 2018
“Dry fields leave wheat futures poised for ‘explosive’ gains.”
– Bloomberg, June 3, 2018
To provide some context: the story quoted above talked about “wildfires, drought and severe heat,” and claimed this is “shaping up to be one of the most perilous wheat seasons in years.”
Dry weather is plaguing crops from Australia to the US, it proclaimed, warning that “yields are under threat and world stockpiles are forecast to fall.”
The story included comments on dryness in Canada. It also addressed the issue of drought extending across the US Plains and alluded to problems in Russia where production is expected to fall 14% from last year.
Apparently adding to the bullish case, it explained the big hedge funds are now wagering on more price gains by wheat futures.
What it means:
Global wheat production is certainly trending lower, but the notion of potentially explosive price gains at this point seems overly sensationalized.
First off, a downturn in the global production at this stage of the game is just moderate and the same can be said for the total supply (production plus carryin from previous marketing year). The world wheat supply-demand sheet is going to tilt away from growing surpluses but not into a severe shortfall.
As the chart here shows, the USDA is projecting that global wheat ending stocks will decline from the previous year in 2018-19, although supplies will still remain on the high side of the range since 1990-91.
Secondly, when hedge funds are big buyers of a commodity it is not necessarily a bullish signal. In fact, at the DePutter office, we monitor fund positions and when they become unusually net long, that’s when we watch for signs of reversals in up-trending markets – and when we consider making sell-recommendations.
Bullish headlines? Get ready to sell
Additionally, when weather worries such as this are widely circulated in the media, usually the in-the-know commercial companies have already been adjusting their positioning to account for the potential supply reductions. Point being, when media reports like this become really widespread and it’s easy for the writers to find bullish analysts to quote, that’s when you want to be attentive for selling opportunities.
In this case, the very factors commented on in this story were partly responsible for a rally that peaked May 29 – before a heavy break in more recent days.
All this is not to say wheat markets won’t rally as we move through summer. Futures might very well rally, and quite possibly very sharply – depending on weather conditions and other factors. Several of our fundamental and cyclical indicators do suggest you’ll see more rallies as we move through the coming several months.
Supply reductions but no shortage
And certainly, the news story is correct that supplies are coming down and weather problems in various parts of the world are lining up to cause further reductions.
The leading words that wheat futures could actually explode is, on the other hand, questionable. It depends on what might be categorized as an “explosion” but this is not terminology we would hold out in front of farmers as a high probability event this summer.
Weather markets can be fickle, appearing quickly and then disappearing just as fast. Let us help you catch those rallies with our weekly Market Advisory Service newsletter.
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