Smart Marketing: Wheat slips from high

With the situation in Ukraine/Crimea settling down, or at least not escalating, and rain arriving to provide some damage control for drought stricken US crops with more forecast, prices began to pull back from the highs.

At the end of February we were making similar calls about the direction of the wheat market, and then with Crimea flaring up, prices suddenly reversed.

The rally since then has been impressive, with daily closing futures prices on the May contract peaking US126.5 cents a bushel above the close at the end of February.

Even after the price declines that have set in over the past four trading sessions leading into the end of last week, the gains on the May contract for the month had been $34.67 a tonne, with $31.85/t being added to the December contract.

The sharpest falls occurred on Friday night last week ahead of the end of the month, and the next USDA stocks report, as speculators moved to lock in profits.

There had also been some rain in the US southern wheat belt, which has at least begun to stabilise that crop, with more rain in the forecast for this week.

The strength of the rally has been fed by the geopolitical situation in the Black Sea combining with the worsening drought conditions in the US.

On their own, both factors would have been expected to drive prices higher, but in combination it is likely the price gains have been amplified.

What gets amplified on the way up can also be amplified on the way down.

If diplomatic efforts with Russia ease tensions and make it clear that grain production and shipments won't be affected, the risk premiums in grain prices from this source will strip out of the market fairly rapidly.

If that combines with improving crop conditions in the US winter wheat belt, particularly in key hard red winter wheat producing states, the downward pressure on prices will be greater, much as the move to the upside was stronger than it would have been with just one factor in action.

The rally this March has given Australian growers a good opportunity to finish off their wheat sales from the 2013-14 harvest, and to make a strong start to their 2014-15 sales program.

Although we are still being warned of an El Nino event in Australia, and the global crop is anything but assured, making at least a modest start to forward sales at prices well above $300/t has been a great opportunity.

If we do have a drought in Australia this year, we have to remember the Australian market is different to what we used to have the last time we had a major drought.

Back then the wheat market was still regulated, and we had a single dominant player controlling most of the grain stocks.

Now the market is much more fragmented, and growers have shown the domestic trade that they are willing to store a lot of grain on farm.

Also, we are not likely to have as much export business booked ahead of harvest out of eastern Australia.

This should also cap how high a drought might push prices this year.

A drought market this year will be different to previous drought markets.

Malcolm Bartholomaeus is the market analyst for Bartholomaeus Consulting, Clare, South Australia.