Historic times for wheat
The wheat complex is in the midst of an historic event. The Australian drought is exacerbating already record low world stocks/use ratios, pushing prices sharply higher and forcing massive liquidation of huge short positions and spreads.
As a result, tremendous capital losses by locals and funds have forced them to trader smaller, creating a liquidity crunch in the Chicago wheat pit which in turn is creating even more volatility.
The Australian drought continues to wreak havoc with their crop, with some regions already at the point of no return. The Australian Wheat Forecasters pegged the crop at 11.5 MMT, and USDA's crop report had them at 11.0 MMT, compared to last year's 24.5 MMT. The Australian Wheat Board also shut off exports from their east coast, wanting to protect supplies for their long term customers of Japan and Korea.
USDA issued their monthly supply/demand report last week, taking the Australian crop down as mentioned above, and redistributing their exports among the major exporters. They also lowered the EU's and China's production estimate by about 1.5 MMT each. They also lowered US corn production estimates and took corn ending stocks below 1 billion bushels, sending corn limit up almost immediately after the open.
Other countries are getting caught up in the foray with wheat prices surging around the globe and buyers scrambling to find wheat somewhere that is still relatively cheap. In the Ukraine, the government has issued a ruling that all exports must have a license in order to protect domestic supplies. The slow delivery of those licenses has effectively shut off their exports. In the European Union, wheat futures prices continue to push into contract highs. And of course, here in the US, we are at 10-year highs, with some technical targets taking aim at those all-time highs established in 1996.
And so it goes for the wheat complex, of the five major exporters, only Canada had a good crop. Crop disasters in two major exporters (US and Australia) and crop problems in two others (EU and Argentina) have created a huge increase in volatility and trading volume, but declining numbers of traders and capital are available to accommodate that trade. In the last month, Chicago front month has seen a $1.43 rally with KC at a $.95 rally. These rallies have been almost straight up, with 4 spike high/reversals down that saw no follow-through selling.
Cash markets have not fared so well, with basis down hard on huge farmer selling. In addition, the transportation pipeline is bogged down with corn and beans, and there is little room for wheat movement. Export sales have been sluggish except for last week where we saw 692,000 MT sold, a marketing year high with much of the volume including the Iraqi purchase. To date, total export sales are 20% behind last year at 412 million bushels.
The market is certainly due for a correction, but has yet to find enough sellers willing to step up. Even the slightest breaks are well supported by those still needing to get out of shorts, or short-bought buyers who need to get long. There are also those who need to switch their positions from short to long, and the sudden huge rally has caught many traders scrambling to get right in the market. And the liquidity crunch at the CBOT has forced locals to trader smaller positions, making it even more difficult for the large volume to get executed.