In recent days US wheat futures have hit six month highs. This has occurred regardless of increases in the world wheat crop estimates, growing stocks and continued serious competition out of Russia and Ukraine meeting only lukewarm demand. Make no bones about it, the world is adequately supplied with wheat in the short-term and fundamentally it is difficult to justify current US wheat futures values.
Similar to late 2007 when capital flows assisted US wheat futures to record highs (as the $US weakened toward record lows)...again capital inflows are supporting wheat and again in part due to the weakening $US. Back in 2007 and early 2008, wheat was a dynamic fundamentally demand driven bull market, whereas now there is little to get excited about. The reason is, world stocks are as high as any part of this decade and they are unlikely to fall significantly in the coming year unless the major production problems.
So again, cheap money as a result of policies of the US Federal Reserve (very low US interest rates) is again flowing into commodity and stock markets around the world and creating small asset bubbles. Given that many of the organisations that invest this money work on relative value and not fundamental value, they see wheat as cheap compared to where it was 18 months ago and therefore potentially undervalued.
While this seems very simplistic, as long as the funds throw enough money at the trade, then wheat will continue to be supported and could potentially move higher despite prices needing to fall to reduce world wheat production in line with demand. This makes wheat very susceptible to changes in interest rate policy when the ‘cheap’ money dries up.
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