Excess supply and predictable demand will mean wheat prices will remain range-bound in the coming months, with a panel of traders flagging only the results of the China-US trade deal or a surprise change in interest rates as potential drivers of market volatility.
“I think the big theme in our industry is excess capacity. There are low interest rates and no real barriers to entry,” said Bas van Hoorn, global trade manager for Glencore Agriculture’s Grains Department at the IAOM Middle East and Africa conference in Dubai on Monday.
“We talk about consumption growth, but we see a disparity where capacity growth has grown much faster,” van Hoorn said.
Despite recent cuts in global production, the USDA still expects a record harvest of 765 million tonnes this year – almost 5% year-on-year – while demand is expected to increase by around 3% year-on-year to 755 million tonnes.
This has left the benchmark Chicago wheat contract stuck in a narrow trading range of 80 cent/bu since the start of the 2019/20 campaign on July 1, equivalent to about 15% of the current price.
“Every 120 days we have a new harvest, so these are just short-term issues for the wheat market. Prices are high in the short term, but there is good supply,” said Don Campbell, international general manager at Graincorp.
With market fundamentals well understood and the likelihood of a demand-driven shock underestimated, the dashboard was left to flag outliers as potential sources of volatility.
“A deal between China and the US is still the main thing to watch on fundamentals. Wheat is much less liquid than wheat or corn, which is why it tends to move a little more,” said Michel Meyer, Middle East and Africa. Manager – Grains and Oilseeds at Cargill.
Rumors that China is in the market to buy American wheat have persisted in recent weeks as Beijing and Washington try to forge a trade deal that will reduce the US$$40 billion trade imbalance between the two countries.
“If for some reason – and I doubt it – (China) buys American wheat, that would be a game changer,” van Hoorn said.
Another factor that could surprise would be any change in historically low – or even negative – interest rates, the panel said.
Cheap credit has driven the growth of on-farm storage, changing the energy dynamics in the grain trading business as producers feel financially comfortable and able to maintain their annual production for longer.
“There is more and more storage on farms, but if interest rates rise, the cost of transportation will increase and this will affect spreads and change the fixed price,” van Hoorn said.
Source: AgriCensus
