Speculators distort wheat markets, suppressing prices

The stubbornly bearish wheat market is overdue for a correction, says an analyst.

Speculators are keeping prices depressed with their short positions, but they should pay attention to what the commercials are doing, which is going long, says DTN lead analyst Todd Hultman.

The United States Department of Agriculture reported 1.28 billion bushels of U.S. wheat on hand as of Dec. 1, which is the lowest total in 15 years.

Yet cash wheat prices for soft red wheat and hard red wheat are well below the USDA’s estimated cost of production of $9.03 per bu.

The reason markets are out-of-whack with the fundamentals is that speculators were net short 12,155 contracts of Kansas City wheat and 39,716 contracts of Chicago wheat as of Jan. 12.

Those two commitments in theory obligate speculators to provide the market with 259 million bu. of wheat, which of course is not practical.

“The 259-million-bu. bluff of supplies promised, but not actually owned by specs, has created a disconnect between the current situation and the higher prices low wheat supplies would normally reflect if specs were not distorting the market,” Hultman said in a recent column.

He thinks speculators should pay more attention to what the commercials are doing, because they are the folks that know what is really happening with wheat demand.

They were net long 12,830 contracts of Kansas City wheat, 43,529 contracts of Chicago wheat and 2,147 contract as of Jan. 12.

Hultman said that is the largest vote of confidence in Kansas City wheat by commercials since August 2020, a previous time that wheat prices were about to trade higher.

ProMarket Wire analyst Errol Anderson agrees that the wheat market should be bottoming out, but he is not convinced speculators are as out-to-lunch as Hultman indicates.

“There’s a reason why they’ve stayed short,” he said.

And that reason is that U.S. wheat has been getting destroyed in export markets by cheaper Black Sea wheat.

Russian consultancy IKAR recently raised its Russian wheat forecast to a whopping 45.5 million tonnes, well above the USDA’s estimate of 43 million tonnes.

However, Anderson thinks speculators have overdone it and that Black Sea exports will soon be running out of steam, which should breathe new life into U.S. exports.

“The wheat futures have gone lower than I expected, and we should see some form of recovery. I agree with that,” he said.

Farmlink Marketing Solutions analyst Neil Townsend is also “slightly bullish” wheat because stocks of the big eight exporters have been getting tighter for six or seven years in a row.

He will change his stance if the USDA’s 2022-23 Russian production number of 91 million tonnes turns out to be correct.

The Russian government and most analysts from that region of the world believe production is closer to 100 million tonnes, but the USDA fiercely defended its number in its latest world supply and demand report.

“If it is the USDA number, I am very bullish wheat,” he said.

Townsend said production is set to fall sharply in the Black Sea region in 2023-24.

Russia’s winter wheat plantings are down six or seven percent, so production could be closer to 85 million tonnes in the coming year if yields return to normal.

UkrAgroConsult estimates that Ukrainian growers seeded 9.3 million acres of the crop, a 40 percent reduction from last year’s plantings.

“The rise in domestic wheat prices happened too late to encourage farmers in the western and central regions to expand wheat areas and thereby offset declines in other growing regions,” UkrAgroConsult grain market analyst Maryna Marynych said in a recent article.

“These areas will be enough to satisfy domestic demand and even produce surplus for export.”

Production is forecast at 15.8 million tonnes, a 16 percent drop from last year and about half of its pre-war output.

“Ukraine’s role in the world wheat market will become far less in the next season of 2023-24,” said Marynych.

Townsend said the Black Sea situation for the upcoming year bodes well for a rally at some point.

Farmlink is also forecasting a “major rally” in the wheat market during April and May.

It notes that the current Black Sea export agreement expires in late March and Russia appears to be preparing for a major spring offensive.

“There is a high probability that wheat exports come to a halt from the Black Sea in April,” stated the publication.

It also noted that the U.S. winter wheat crop continues to experience drought, while exportable supplies of European wheat has been drained.`

Tags: cost, demand, speculators, UkrAgroConsult, USDA, grain, prices, Production, wheat, forecast, Market