The U.S. Department of Agriculture just upwardly revised U.S. wheat production prospects on the back of better-than-expected yield reports emerging from the ongoing U.S. harvest.
But even as harvest progress continues to weigh on near-term market sentiment, wheat prices are at risk of pushing higher as global demand prospects pick up and jittery short-biased speculative traders try to buy back positions before crop prices regain much upside momentum.
The approach and onset of the winter wheat harvest in the U.S. traditionally spurs speculative traders to establish short positions in those markets as the cutting and delivery of millions of tons of fresh wheat typically pressure prices going into the early summer months.
And that price pattern has certainly unfolded again in 2013, with CBOT wheat futures slumping from more than $7.05 a bushel in early June to below $6.50 at the start of July. This erosion in wheat prices in turn encouraged an escalation in short selling by speculative traders, with non-commercial traders sitting on their largest collective net short positions in the Chicago and Kansas City winter wheat markets in five-year highs as of late June.
Now that the U.S. wheat harvest has passed the halfway mark, and global wheat is being projected to pick up in response to the more attractive price levels, at least some of the traders who had previously sold wheat futures at higher prices are expected to start to look to buy those positions back in order to lock in profits.
In addition to concerns about increases in global consumption rates, short-biased wheat traders will also be mindful of the recent change in the outlook for the U.S. dollar, which has strong influence over commodity price action.
For most of 2013 the U.S. dollar has trended generally higher on the assumption that the upbeat tone of U.S. equity markets will spur the U.S. Federal Reserve to ease off its quantitative easing program that has flooded the U.S. economy with cheap funds designed to stimulate growth. Expectations for an eventual rise in U.S. interest rates have also been supportive for the greenback.
Following a recent pronouncement by the U.S. Federal Reserve Chairman that ‘easy money’ policies would remain in effect for the foreseeable future, the U.S. dollar has trended lower, and forced commodities traders to brace for a renewed period of U.S. dollar softness that should generally be supportive for most commodities.
For traders holding short exposure to wheat, this development has likely provided another reason to start buying back some of those positions, especially given wheat’s clear tendency to respond to dollar moves in recent months.
The unwinding of speculative short positions over the summer months is actually a fairly common occurrence, with clear trends being evident in each of the past three years around this time in the season.
In 2010, wheat production problems in Russia drove global buyers towards the U.S. for supplies, and so prompted a historically quick swing in speculator sentiment from broadly bearish to aggressively bullish in the early summer of that year.
A similar swing occurred last year as the hot and dry conditions unfolding in June and July ensured crops would struggle to reach their yield potential and ultimately leave supplies tighter than originally expected.
This year the overall outlook for crop development remains broadly favorable, so there is less urgency at this stage for speculators to switch their view from bearish to bullish just yet.
Still, the projections for global wheat demand to climb in the months ahead should be enough to spark a collective trimming in short exposure by the non-commercial community, which tends to act in unison once acknowledged trend changes have taken place. The USDA’s recent projections for a tightening in World wheat stocks – largely due to higher Chinese imports – should offer an additional incentive to reduce short exposure.
Furthermore, should wheat prices gather sustained upside momentum, and a consensus emerge that additional gains look likely, the temptation for speculative traders to reverse their bias from short to long will increase to potentially add even further thrust to any upcoming wheat price advances.
So while the recent and near-term price bias in wheat may be to the downside as harvest continues at pace, prices may start to veer higher before too long as firmer global demand rates chew through inventories and net short speculative traders begin to trim or verse their positions.
Gavin Maguire is a Reuters market analyst. The views expressed are his own.