WHEAT futures ended last week on a strong note, finally breaking above the main trading range since the third week of June, and moving above the high set in early July.
The gains are being underpinned by a bullish US Department of Agriculture Report which shows pressure coming onto global wheat supplies.
That said, the position for the US is not so bullish with ongoing high stocks in that market.
What it means though is that more than 50 per cent of the stocks being held by major exporters will be held in the US by the end of this year.
As the supplier of last resort, that means that attention could very quickly turn to US wheat supplies as soon as importers find it harder to extract the supplies they need from the European Union, the Black Sea, Canada and Australia.
While the gains are being underpinned by the global balance sheet projections, the current rally is being fuelled by ongoing downward revisions to crop production in a number of regions covering the EU, Russia and Ukraine, Australia, and more recently Canada.
In the case of Canada, the latest production estimates are factoring in a 200,000 hectare reduction in planted area reported by StatsCan several weeks ago.
However, Canada has also joined the watch list for rainfall, with timely rains now needed in some areas to prevent yields from coming under pressure.
Soil moisture levels in Canada vary from being good in northern areas, to being overly dry in southern areas.
There is also pressure building on spring wheat areas in the US as well, despite their current strong condition ratings and very good season to date.
Although normally under seasonal downward price pressure during July, this year wheat futures are responding to the growing list of major global production areas that now need “timely rains” to maintain yield potential.
It would appear that there are too many regions in this category for every region to get the required rainfall at the right time.
That takes us back to demand for US wheat, and that will be driven by prices.
At the moment EU wheat prices have risen and US hard red winter wheat is now priced at a modest discount to German and Baltic States high protein wheat.
The problem seems to be Russian wheat prices, where US prices still hold a significant premium, with the premium lifting over the last week.
It is likely to be the ability for the US to sell wheat against Russian supplies that will determine how robust the current price rally will end up being.
Until Russian wheat prices get dragged higher by rising EU prices, or from tightening export supplies in their own market, it will remain difficult for US exports to make much headway.
Meanwhile Australian production also remains under a cloud.
South Australia and Victoria are getting some rains into the end of July, but in the main, totals will be below average.
Nationally the most secure production seems to be in parts of Western Australia and southern fringes of South Australia and Victoria.
This will be the first time since deregulation of our wheat market that we have had a tight Australian crop against a declining global crop as well.
Another unknown in trying to pick production levels both here and overseas, is how well we have become at growing wheat in dry seasons.
