12 March 2020
Wheat markets started 2020 on a positive note with price increases building on an upward trend that began in September 2019, but this momentum higher has been lost due to successive waves of bearish influences from coronavirus. Global wheat prices (figure 1) had managed six months of consecutive price rises after hitting the oversupply price nadir in August 2019, expected reductions in the wheat area in the US and EU, planting issues in Europe and forecasts of declining stocks all supported wheat markets.
In February this trend began to turn as the implications of the COVID-19 virus pressured the agricultural markets (and all markets in general). In this article, we examine the factors which turned the wheat markets around and investigate if the damage is complete or more downside in prices can be expected.
The outlook for wheat in Q3 2019 turned positive as low prices were expected to lead to reduced area; this was exasperated as heavy rain in the EU hindered planting in the autumn. Prices from the Black Sea also began to tick up as harvest pressure abated, and the Australian crop outlook continued to be reduced.
In October forecasters said US wheat area would fall to a 110-year low and the USDA forecasts showed falling local stocks in the 2019/20 season. These factors helped the UK’s milling wheat price as reported by the AHDB, increase 19% in six months to February (on a monthly average basis; figure 2); the global wheat price benchmark in Chicago was up 18% in that time.
Despite the price rise and bullish move the wheat market fundamentals for the current crop (2019/20) are not overly supportive. The wheat markets were burdened with high inventories from the 2019/20 crop (figure 3) and stocks-to-use ratios remain elevated (much of the stocks are located in China). The largest crop in history in 2019/20 filled silos and pressured prices. The price move higher; therefore, was based on outlook and continued reduction in supply.
This outlook now has been upended by the COVID-19 virus and the turning lower of most markets. The focus on the wheat market is no longer the fundamentals but a collection of bearish economic outlooks based on the impacts of the disease.
Wheat prices peaked on the Chicago exchange on Jan 21, 2020 but have turned lower since, corresponding with increased coverage and interest in the virus (figure 4). The virus has impacted the macroeconomic outlook and most commodities and equity markets are lower.
As further cases have been confirmed and the geographical spread continued the markets have fallen in step. During this period, supportive news that an African Swine Fever vaccine looks promising had only fleeting impacts on grain prices. Will wheat and commodity markets continue to fall as the virus spreads, or will the fundamentals of the market start to minimize the influence of the news feed? The scale of the correction in the wheat market will depend on how speculators view the impacts of the disease and the implications for their cash flow.
Non-commercial traders in the Chicago wheat market, the speculators who trade based on their view of future movement (and not for hedging reasons), have liquidated the gross long position since the virus spread to Europe and the US (figure 5). This long position had been growing since November 2019 supporting prices.
Given the movement since the position report release the net position for speculators is likely flat (the longs equal the shorts). The position was a net short as recent as July 2019, when prices averaged $4.60/bu (11% below current prices). If speculators see the virus as a bearish factor that will keep prices under pressure an increase of shorts could result in a position like that of July and could result in further downside to the global wheat prices.
Wheat prices are now moving with the coronavirus news flow and this is not likely to change unless there is a significant change in the outlook of the coming season’s crop. This scenario may result in speculators trading the market from the short side (as they expect prices to keep falling) and this would add pressure to prices.
The underlying fundamentals of the coming season remain supportive and a mediating factor, but they are priced in and it is hard to anticipate when the fundamentals will slow the fall in commodity markets due to the global coronavirus pandemic.
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