Looking for Santa Already
Grain markets this week were a bit muted as the U.S. Thanksgiving holiday interrupted any sort of momentum the market was finding. JP Morgan is telling its institutional investors not to have a buy and hold strategy in 2018, but rather “take advantage of price swings.” They do note though that they are bullish on Kansas hard red winter wheat prices. They also think that corn prices could improve as crop production prospects heading into 2018 are a bit smaller.
I would argue that it was a factor for sure, but the one variable I'm starting to watch more is some drier conditions in the major U.S. winter wheat growing regions. Considering the short position that managed money is holding in both corn and wheat, we might see a short-covering rally before the end of the year. We’ve seen grain prices on the futures board traded practically sideways for the past few months. Perhaps its time for those bears in the short positions to take their wins (or losses) and cover their positions before Christmastime (must pay for presents under the tree somehow).
Midway through November, Russia has exported 14.8 million tonnes of wheat so far in the 2017/18 crop marketing year. This is up 26% year-over-year. Comparably, total Canadian wheat exports (including durum) are sitting at 6.78 million tonnes. That’s technically up only 2.5% year-over-year. However, if you just look at wheat exports not including durum, the 5.7 million tonnes shipped out thus far are tracking about 9% above last year. Digging deeper, only 1.08 million tonnes of durum wheat have left Canada this year. That’s down 21% year-over-year.
As another comparison to Russia, the average price sitting at Black Sea ports for 12.5% protein wheat today is $191 USD/tonne. Out of Canadian west coast ports, similar 12% protein wheat is has FOB price of roughly $192 USD / metric tonne. Digging deeper, 12% protein wheat out of Argentinean ports is around $175 USD / tonne and French 11.5% protein is sitting at Rouen ports for $192 USD / tonne. As you can tell, other than Argentina, Canada is competitively priced today. So why isn’t more wheat being exported? The answer is that this is FOB price. And unlike Russia, Egypt isn’t next door.
Overall, considering the amount of short positions that the market is holding and the unwillingness of the futures board to go much lower, perhaps basis is where are opportunities are going to be found next in the wheat market. That is, if we don’t see a Santa Claus rally.
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