(The author is a Reuters market analyst. The opinions expressed are his own.)
By Gavin Maguire
CHICAGO Nov 14 – U.S. wheat prices have lost around eight-10 percent in value over the past two weeks or so as a strong start to the 2013-14 winter wheat growing season coupled with a slowdown in U.S. export activity weighed on sentiment. Speculator position rolling out of nearby futures contracts also pressured prices.
But Chicago wheat futures are looking primed for a recovery after the price pullback served to make U.S. wheat prices their most competitive versus other top export origins in months and as the ‘fund roll’ winds down. A fresh tender from the world’s top wheat importer, Egypt, also potentially sets the stage for a recovery bounce.
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SLIPPERY SLOPE
Both classes of exchange-traded winter wheat in the U.S. — Kansas City Hard Red and Chicago Soft Red — have followed a generally declining trajectory since the start of the year, losing roughly 13.5 and 14.5 percent respectively since the first trading day of the year. A general deflating in global grain prices driven by a rebound in crop supplies fueled the decline.
But from mid-September to mid-October U.S. wheat values staged an impressive recovery drive as global export interest picked up amid growing problems in areas such as South America and parts of the Black Sea which threatened to cap inventory growth at key export origins.
Chicago wheat values nearly clawed back all of 2013’s losses during that stint, thanks in large part to strong import demand from China.
Since the third week of October, however, wheat values resumed their downward grind, and actually accelerated to the downside lately amid an absence of further export interest from China or elsewhere.
Still, with futures values now not far from their mid-September lows, signs are starting to emerge that suggest another price recovery rally may be on the cards.
MIND THE GAP
One of the key factors raising expectations for a U.S. wheat price recovery is the recent narrowing in the spread between U.S. export prices and those from other origins.
The spread between U.S. and Ukraine wheat prices has narrowed from more than $50 per tonne in mid-October to less than $12 recently, making U.S. exporters potential candidates for supplies for any buyers concerned about diminishing availability out of the Black Sea region.
More significantly, the U.S. versus France wheat spread has been cut to less than $2 a tonne from close to $20 a month ago, thereby ensuring that U.S. suppliers pose a serious threat to French exporters who were widely expected to capture the lion’s share of global wheat trade over the near to medium term thanks to hefty supplies.
The presence of the United States as a possible origin of supplies in the latest Egyptian state tender for roughly 120,000 tonnes confirmed that U.S. wheat prices had descended to competitive levels lately after having been off the radar of import buying in recent weeks.
BASIS PICK UP
Another key sign of a potential price turnaround has been the uptick in basis levels at key U.S. wheat consumption centres. Spot basis bids for soft red wheat in Toledo, Ohio picked up since the start of November as originators in that key milling and distribution location sought to ensure a steady draw of supplies even as futures values stepped steadily lower. A similar basis trend was evident in other locations as well.
A further indication of rebound potential has been the rise in call buying interest in March CME wheat options at strike prices well above recent futures levels.
March futures declined to below the $6.60 per bushel level lately amid the general grain market retreat, yet traders dialed up purchases of calls tied to the $7.00 and $7.10 strike prices that will only appreciate in value once futures prices recover substantially going forward.
This willingness to establish positions that only pay off if prices rise over the coming months suggests a growing number of participants view the recent retreat in wheat values as likely being close to its end, and that prices may embark on an upward climb early in the New Year.
And should U.S. suppliers win a share of the upcoming Egyptian wheat tender in a sign of regained global price competitiveness, that price climb may even begin within the coming days.
