One of the biggest commodity stories of the year has been the one-way trip much of the grains market has been riding since the end of June. While the initial driving force was the Russian drought and subsequent Russian ban on grain exports for a number of years, other factors such as constricting supply, other global weather problems and production questions helped extend the rallies seen in wheat, corn and soybeans.
"When I look at markets, long-term fundamentals, such as supply and demand, ultimately come back to make the final decision," says Robert Chesler, risk management consultant at FC Stone. "In the short- and medium-term, though, it is the motion that dominates the market and that is what we have seen in the [grain markets]."
Additionally, higher prices in both the grain and meat markets attracted a record number of spec longs that only helped to push these markets higher.
The big story in the wheat market (and arguably the whole grain complex) has been the drought that hit Russia this summer. As you can see in "Waves of wheat" (below), as news of the Russian drought, its subsequent impact on the Russian wheat crop and eventual Russian grain export ban hit the markets, a fire was lit in wheat pushing it from $4.42 per bushel on June 29 to a high of $7.85 3/4 on Aug. 5, a gain of over 77% in a little over a month.
"In terms of a couple of hot button numbers, there was over a 30% drop in Russian wheat production, in Kazakhstan a 33% drop and about a 20% drop in Ukraine," says Rich Nelson, director of research at Allendale.
The potential impact was easy to see. "If we go back to the move up that started in July, we can see that it was dominated by eastern European fear. So what you have is a great deal of physical short covering coming into the market along with speculators that ran in front of them," Chesler says.
Additional concerns in the wheat complex have come from other areas of the world including Canada, which had a rough planting season this year because of too much moisture and more recently faced frost concerns; and the European crop has seen problems arise in both production and quality. Europe has seen less wheat graded as mill quality and more in the lower feed quality. "The bottom line is we had a severe drop in production at the same time as some tight supplies of milling quality wheat," Nelson says.
Despite these problems, supplies are still doing quite well with the September World Agricultural Supply and Demand Estimate (WASDE) putting projected wheat stocks at 902 million bushels, the second highest in more than a decade, if the projection stands. "In terms of the big picture, one of the things we need to keep in mind is that wheat supplies are not actually tight. All these production problems have done is taken us from a burdensome supply picture down to a normal supply picture," Nelson says.
Going forward, weather and geo-political factors are what traders need to watch. Already, Russia has begun experiencing milder weather and at least one lower level Russian official has hinted the Russian grain ban may not be as bad as was previously expected. But that will most likely depend on weather. "They are getting some really good weather right now, and if that persists and they get some good planting done, then they should definitely be able to lift the ban. If it turns back toward drought, the ban could hold," Chesler says.
Other countries are showing an ability to fill some of the holes in the world wheat supply, too. According to Phillip Streible, senior market strategist at Lind-Waldock, Australia’s wheat production may hold the key.
Looking to the markets, the analysts we talked to put the December wheat contract trading in a sideways type of mixed market through the first week of November with support levels around $6.50 and an upper resistance at $8.00.