Wheat Market Outlook

According to Mercantile, traders are working through the several unusual dynamics in the markets. Mercantile does not expect much change during the week, especially since they have a new WASDE report coming on Thursday. Mercantile prefers to hold additional sales this week given the number of unusual occurrences happening, and a new WASDE report which could be slightly bullish. Mercantile would not suggest additional sales at this time.

Mercantile says wheat markets crashed when the USDA’s Small Grains Summary put wheat production much higher than the trade expected. Russian wheat is still talking most of the export demand. Although Russian export price schemes continue to create confusion in the market, it seems like the Russians have lowered their floor price according to Mercantile. Mercantile does not see much reason for better prices in the short term.

Mercantile believes North American wheat remains too expensive except for special hard wheat buyers. The stock position will be important for future direction. Year to date usage remains low according to Mercantile. The Russian crop is large and storage problems will force sales there. Mercantile expects that futures will continue to fall in the short-term, and then improve in the New Year. Mercantile would not suggest additional sales at this time.

In Mercantile’s view, the WASDE report was constructive for wheat. However, exports year-to-date are disappointing and some will question the USDA’s export forecast as being too high. Nevertheless, we ‘might be’ at a tipping point in the wheat markets. Over much of the summer, consumers have taken advantage of declining spot prices to lower their buying average. Seasonal upswings from this point in the year are typical, says Mercantile, and while consumers seem to be generally well covered for the fall positions (O/N/D), they are still mostly open for 2024. Russia is still the cheapest source of wheat by far but does not offer far forward. So, consumers will have to choose to stay open/uncovered, or else to cover from more expensive origins says Mercantile. Mercantile would not suggest additional sales at this time.

Mercantile says the focus of the markets will be the USDA-WASDE reports next Tuesday. The seasonal tendencies for wheat prices to rise into the winter and the anticipation of reduced Southern Hemisphere and Canadian supplies are the main bullish motives in coming weeks, according to Mercantile. The counter arguments are that this is already priced in with the large carries in the cash and futures market. Mercantile is worried about the aggressiveness by Russia into the export markets despite reports of problems with their spring wheat crop.  Russia is taking up a lot of import capacity, in Mercantile’ s opinion. Mercantile still expect markets to move higher in the New Year, but from what level? The wheat market remains very complicated, but Mercantile expects it to move higher in the New Year, so storage is important.

The fund position across the three wheat futures markets is now a combined short of 95k contracts, but still well below the deepest short they have held of around 150k contracts during 2016-2017 according to Mercantile. The wheat market remains quite complicated, and both bearish and bullish arguments can be made. For example, the bears in the market point to the boundless flow of four million mt (+) per month of wheat from Russia, which is affecting other exporters’ volumes. (EU and U.S. exports down 20-30 per cent on last year.) The Russian private sale outside the usual GASC tender system of almost half a million mt of wheat to Egypt over the weekend only confirms the Russian aggressiveness to just keep selling. On the other hand, Mercantile says the bulls in the market are shifting their attention from the logistic effects of the Russia-Ukraine war to potential Indian wheat imports and by focusing on declines in southern hemisphere production to reduce supplies. The market seemingly awaits confirmation from either (or both) sides before making a definitive move, says Mercantile.

Mercantile will have to see how the trade reacts this week to the additional Russian sales to Egypt outside the usual tender system that happened over the weekend. The drop in OI in U.S. wheat futures and the expanding fund short make U.S. futures increasingly vulnerable to de-linking further from world wheat values.

So, the wheat market remains very complicated, but Mercantile expects it to move higher in the New Year, making storage important.

The Sask Wheat market outlook for August 28, 2023.

Mercantile says, Russia continues to push wheat into the market while buyers are being very cautious in their buying and remain so in a falling market. However, Canada, Argentina and Australia all now have significant crop concerns, which along with a potentially significant major import program by India could materially change the market in the latter half of the season, according to Mercantile. Mercantile expects markets to move higher in the new year, so storage is important and selling as little as possible for now. Mercantile says producers will have to be patient with this market to work through some of the cheaper

According to Mercantile, Russian/Black Sea wheat sales levels remain below North American levels.  On the demand side, Mercantile thinks financials are pressuring new buying and harvest pressure is keeping prices lower.

Spring wheat remains too high compared to Chicago futures in Mercantile’s opinion. However, if you don’t have cash flow needs, Mercantile would put grains to storage and wait for higher prices in the New Year.

Mercantile says North American cash and futures prices need to go lower to be competitive with other competing origins. The premium of spring wheat over lower grades remains too high and must go lower according to Mercantile. Weather will provide volatility in the markets and news services will carry stories of drought in North America and too much rain affecting quality in Europe. The conflict in the Black Sea needs to be watched. The ability of Black Sea wheat to be exported is important. Real developments in India need to be watched if the USDA confirms India needs to buy volume wheat it is bullish for wheat particularly Russian.