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The Bullish Risk of Being Too Bearish

The Bullish Risk of Being Too Bearish

16 May 2015

GLOBAL - Given the market events of the last year and especially recent weeks you’d be forgiven for thinking that grain markets would be going down forever. Actually, you’re probably not alone given the short term focus on strong old crop supplies.

The beginnings of a rally occurred this week with Nov-15 feed wheat futures closing up £2.80/t – the biggest one day gain since early February.

The market also found some more support earlier this morning. With speculators essentially selling grain markets short, an upward market movement sets alarm bells ringing and triggers stop losses into action – essentially the buying back of short sold contracts.

It’s unlikely that there was any specific trigger to yesterday’s turn in the market and it is likely to be a combination of:

• A weakening US dollar: With global commodity trade denominated in dollars, weakness in the currency supports the dollar price, encouraging speculators to buy. There is a risk for the UK here though in that a falling dollar impacts UK export competitiveness onto the world market – something that we have been more reliant on this season in light of a strong pound against the euro.

• El Niño: As we covered in Wednesday’s GMD, El Niño is back in focus with the market forced to accept that current US weather is very ‘El Niño like’ and the possible risk for Australian grain production in 2015/16. The broader media coverage of El Niño brings this to the ‘outsider’s’ (speculator’s) attention, taking some of the bearish tinge away from their market view.

• South African crop concerns: If activity on Twitter is anything to go by then there are dry weather concerns for this relatively small grain producer. It’s another reminder of the risk that faces production but, this risks being overstated as a driver of the global market.

• What is the Russian intervention price? There have been reports that the Russian intervention price is above the export price, indicating that export pace could be compromised – potentially shifting more export business to the US/EU.

The price context

Even on the back of yesterday’s rally, the Nov-15 market remains some £12/t off of the post planting average – so there remains a long way to go for those banking on a complete recovery in the grain price.

Caution is advised towards this rally as it could be a blip in the existing trend rather than a change in direction – the outcome of which will be determined by weather in the coming months.

UK exports back in the picture?

UK export prices have undergone a complete somersault with regards to their relationship with futures prices during the course of this season.

UK feed wheat export prices are now at a premium of almost £10/t against nearby futures prices, compared with a discount of around £2/t in July.

This shows that the UK is no longer ham-strung by the futures market mechanism when it comes to trying to compete in the export market. How UK FOB values compete against other origins and the flow of grain from farm (rather than storing into the new season) will also be important factors.

TheCropSite News Desk

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