In a very short time, the price of wheat on the futures market in Paris has risen to almost €212 per tonne. The 2018 record is now approaching. What is this price explosion based on and can the quote maintain this level or perhaps rise further? Now is also a good time to think about hedging for the 2021 harvest.
A sudden price explosion for wheat came as a surprise to many on the Matif futures market in Paris. Wheat is also trading at significantly higher prices in Chicago. There, market sentiment has completely changed after years of negativism. And this while stocks in the country are considerably higher. What are the causes for this?
| Price determining factors |
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1. High demand for wheat worldwide by countries such as Egypt and China. 2. Russian arable farmers are reluctant to sell, causing the physical price level to increase. 3. The ruble is favorably priced against the dollar and euro. 4. Drought in the major wheat areas worldwide with the exception of Europe. 5. Uncertainty due to increasing number of corona infections. |
Hoarding behavior due to corona
It is not the first time that the futures market has had to deal with a sudden price increase. Unlike some other products, wheat thrives on the uncertainty that corona brings. Wheat flour is a basic requirement for bread and many other products. Countries with large stocks are therefore reluctant to export. Even a hint at a possible export restriction is enough to get the market moving. Russia faced such a restriction last export season, although it did not cause any problems. The Ministry of Agriculture has announced that it will closely monitor domestic wheat stocks this season.
China controls 50% of the world's wheat and corn supplies. Stock market analysts also speak of a 'paper stock' because no one knows in which warehouses and silos the products are actually stored and whether this is the case at all. The fact is that Chinese state merchants have found their way to the US again and are buying up huge quantities of soy, corn and wheat. Russia can also benefit from this hoarding behavior. Countries in the Middle East (particularly Egypt) are doing the same. They have traditionally been, like Morocco and Algeria, the largest buyers of French wheat. The Russians and Ukrainians are increasingly gaining a foothold there. The product quality there is improving, the wheat is cheaper and can be supplied quickly. France has now been struggling with shortages for 3 years and is therefore forced to cancel. In the meantime, African countries are submitting one tender after another.
New record
During the first wave of infections, the futures market rose from €170 to €203,75 at its peak in Paris. When the new harvest arrived, the market collapsed like a house of cards, to more than €180. Things simmered around this level for a long time, until tensions rose again worldwide. The April ceiling has now been breached. On Monday, October 19, the December contract on the Matif closed at €211,75 and on Tuesday, October 20 it is trading at this level again. The CBoT also made another step, to $230 per tonne. The highest level in almost 6 years. Only in the summer of 2018 was wheat priced even more expensive in Europe, although this level of €216,25 is no longer so unattainable.
In addition to the uncertainty caused by the corona pandemic, there are the growing conditions for the new harvest that analysts have listed on the stock exchange. It is very dry in both Russia and the southern American Plains, which is detrimental to the new wheat crops. Some Russian growing areas have received some rain, but not enough to make a significant difference. The Americans have the additional advantage that the dollar exchange rate is slightly more favorable.
Harvest in Australia has started
The wheat price continued to be dampened after the harvest by positive reports from Australia and Argentina regarding yields. That too is now crumbling slightly. The grain harvest has now started in Australia, which will last until early January. Especially in the east of the country, the harvest is noticeably better than in recent years. The quality is also good according to the first reports. Much of this wheat will be exported to Asia.
Can the wheat market hold a level above $200 or even $210? With every sudden increase there is a high chance of a rapid decrease. The uncertainty caused by the coronavirus is difficult to gauge. The fact remains that many countries will do everything they can to maintain or increase food supplies. They are prepared to dig deep(er) into their pockets for this. If it does rain enough in the Black Sea region and the south of the US, this will also have a strong negative effect on price formation. In the short term, the price may hold for a while or even make a plus on news occasions. In the medium term, it is likely that prices will slow down.
Price level harvest 2021
This sudden price increase comes at a favorable time for arable farmers. Wheat is currently being sown in abundance in Europe. If the potatoes, onions and carrots come from the land, wheat is also sown directly in the Netherlands where necessary. The uncertain prospects for the potato market in particular may make many growers decide to sow more wheat. The September 2021 contract on the Matif is now quoted at €192,75 per ton, compared to more than €180 a month ago. That is not a great prize, but it does offer an excellent means of covering price risks. The first blow is still worth a dollar.