Russia Discounting Weighs On Big Commodities Loser, Wheat

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Just months ago, there was talk that Russia might re-introduce cartel-like export controls to defend prices of wheat, its main agricultural export.

Now, Russian exporters are bidding to land the grain to international destinations as cheap as possible to undercut their European competitors, as a global glut pulls the bottom out from the wheat market.

Russia Discounting Weighs On Big Commodities Loser, Wheat

Wheat Daily Chart

Wheat futures on the Chicago Mercantile Exchange are the biggest commodity losers so far in 2019, down almost 13% on the year. Last year, wheat was the second best performer among more than 30 raw materials, rising 17%.

Cheaper Russian, European Offers Pressure U.S. Wheat

Jack Scoville, grains analyst at The Price Futures Group in Chicago, who witnessed the transition in Russian wheat marketing strategy over the past year, wrote in a summary this week:

“Ideas and reports of cheaper offers from Europe and Russia continue to put U.S. wheat values down.”

On Thursday, CME’s spot contract for wheat futures, May, hit a 13-month low of $4.3762 per bushel. It is set to finish this week down 4% for a fifth consecutive week of losses, its worst losing stretch in 2-1/2 years.

It’s a remarkable change for a market that just about six months ago was hitting 2-1/2 year highs from a global squeeze in supply.

Strong Sell Recommendation

Technical analysts at Investing.com have a “Strong Sell” recommendation for May wheat, forecasting a support level at as low as $4.1904. Based on Thursday’s settlement, that still gives bears room to sell the market down by almost 19 cents, or another 4%.

Few might have imagined things would get this bad for wheat within a year.

Bryce Knorr, senior market analyst at Farm Futures, reminisced in a mid-February column the overwhelming demand for the grain just two quarters back.

Knorr wrote:

“The wheat market had a bright, shining moment last summer, when threats to crops across Europe and into the Black Sea and Australia raised hopes the time was right for the U.S. to begin selling lots of wheat to a hungry world.”

Cartel-style controls by top exporter Russia provided traders another reason to bid prices up then.

After a successful campaign in restricting exports during the summer to aid the rally in wheat—just like its current production-cutting pact with OPEC to boost oil prices—Russia planned to limit shipments on some 18 million tons of the grain through June this year, industry sources said.

High Yields, Benign Weather Lead To Bumper Crop

That plan never came through. Knorr said better-than-expected grains yields outside of northern Europe and Australia resulted in a bumper crop as 2018 drew to a close.

He added:

“Sales, by and large, were slow to materialize. Business finally picked up as the calendar flipped to 2019, but it may be too little, too late for a wheat market on the verge of life support.”

Scoville said that aside from the boon to global production from good European and Australian yields, benign weather in the U.S. was also helping the domestic wheat crop.

He added:

“The fall season in both winter wheat regions featured a lot of rain that hurt harvest and planting all season long. Wet weather has continued for much of the winter, and it is likely that the crop will have good soil moisture to work with as it comes out of dormancy in the next month.”

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