Last week I read in an international new wire ‘Australian wheat farmers are contending with a plague of locusts’. This was just one of the reasons used to explain the rally in grain prices over the past month.
While the locusts may become an issue for this crop down the track, it is drawing a long bow to tie this to the recent rally in international grain prices.
When you here this type of thing you get the feeling that something is not quite right. Make no mistake! The bulls have got hold of this market.
Analysts are searching far and wide for reasons to explain recent large price advances. Sure there have been some fundamental drivers (Canada, Europe, Russia, USDA revision to corn stocks and now hot weather in the US), but a large part of the gain seems to be linked to speculative fund shorts looking for a way out of wheat.
What would explain the fact that wheat has the most comfortable balance sheet of any of the grains, but is now leading the market higher? Since mid-June the wheat market has rallied 150USc/bu or 33%. Wheat stocks will fall in the coming year, with latest estimates that stocks will fall by 3% to be the second largest level since 2000/2001, hardly the justification for a 33% price rise?
Even if you wipe another 20mmt from wheat stocks (putting production losses at 2 times current estimates), wheat stocks to use would still be at a comfortable 25%.
One thing we have learned is not to get in the markets way when it is in this mood. Speculative traders who have been short this market may decide to change their view 360 degrees and take a long position. Meanwhile, ideas of record US corn yields seem to have gone by the by. With the recent tightening in the corn balance sheet, weather forecasts over the next month or so will be crucial in determining corn prices.
Expect grain prices to provide plenty of excitement over the next month or so as we head into spring.