There are finally some signs of life in the wheat market.
Prices surged last week by the most in 15 months after the U.S. Department of Agriculture unexpectedly cut its forecast of global inventories. That was fortuitous for some speculators. A day before the Oct. 12 USDA report, funds cut their record bets that prices would drop.
Futures are crawling back from tough times earlier this year, when signs of the biggest supply overhang ever sent prices in August to the lowest in a decade. Since then, importers have stepped in to take advantage of the low costs. Countries including Algeria, Egypt and Syria were said to purchase or seek wheat this month. Global shipments will climb 1.6 percent this season to an all-time high of 174.7 million metric tons, the USDA predicts.
“You need something new to be bearish at those levels,” said Gillian Rutherford, who helps oversee about $12 billion as a commodities portfolio manager for Pacific Investment Management Co. in Newport Beach, California. “Looking forward, our bias is that the momentum is constructive.”
The wheat net-short holding contracted by 11 percent to 135,406 futures and options in the week ended Oct. 11, according to U.S. Commodity Futures Trading Commission data released three days later. In the prior week, the negative bets had climbed to the largest ever in the government records that start in 2006.
Wheat futures for December delivery gained 6.6 percent last week on the Chicago Board of Trade to $4.21 a bushel. It was the biggest gain for rolling most-active futures since June 26, 2015. December futures rose 0.7 percent to close at $4.2375 on Monday in Chicago. The price for the most-active futures contract is now 9.8 percent lower this year, paring back losses seen earlier in 2016.
After years of losing market share because of a strong dollar, U.S. supplies are becoming more competitive in areas including North Africa, the USDA said. The agency expects American exports to rebound 26 percent this season. Some nations, including France, had poor crop quality this year amid adverse weather conditions. Buyers are looking for better quality grain, especially for varieties with higher protein levels.
The prolonged agriculture rout may also be bottoming as farmers start to curb output. Wheat futures in Chicago have posted three straight annual declines. U.S. farmers, in the midst of seeding winter crops, will probably reduce acreage, Societe Generale SA analyst Rajesh Singla said in an Oct. 11 report.
As growers sow less, weather concerns remain. A dry spell in western Kansas and eastern Colorado may maintain moisture stress for the newly-seeded crop for two weeks, Commodity Weather Group LLC said in a Oct. 14 report.
There’s still a supply cushion. Despite improving demand, domestic reserves are expected to swell to the highest since the 1980s this season, helping to push global inventories to a record, USDA data show. American farmers are also expected to collect a record corn harvest, which could limit wheat’s rebound because the two crops jockey for use in livestock rations.
At the same time, U.S. wheat prices will need to stay low for exports to remain competitive against other countries. Russia will maintain its hold as the world’s largest exporter for a second year, according to USDA forecasts.
“When you’ve got the stocks we have, just the sheer quantity, and the fact that you’ve got this monster corn crop coming in the door, that’s going to keep a lot of pressure on wheat prices for quite some time,” said Steve Nicholson, a vice president of food and agriculture research at Rabo AgriFinance Inc. in St. Louis. But, prices are “probably close to the low,” he says. “I don’t know that I could say they’ll get worse from where they are right now.”