After a closing price of €272,75 per tonne for the most current wheat contract on the Matif, the September delivery quote fell sharply. Wednesday, August 25, €27,50 was deducted from the price. How is such a large drop noticeable and has the wheat market been misled?
Initially, the foundation under the European milling wheat quotation felt even more solid than was already the case. Yield expectations in the EU are high eroded compared to this spring. On Wednesday, the German agriculture ministry came up with a lower one yield forecast due to persistent bad weather.
Stable long term
Yet the price of the September wheat contract on the Matif moved in a completely different direction on Wednesday. After a price of €272,75 on Tuesday, the price closed at €25 per ton on Wednesday, August 245,25. A decrease of €27,50. The price of the December contract fell only €2,50 per tonne, showing that the longer term is much more stable. The spread between September and December delivery had increased to above €26 due to the recent price increases, which is (too) large.
The contract for milling wheat delivery in September expires on Friday, September 10. This means that all open positions must be settled at that time. More than 16.000 positions were still open on Wednesday afternoon, compared to 27.500 at the beginning of the week. The significant price drop is due to what is called a 'short squeeze' in stock market terms. When going short, the stock exchange participant expects the price to fall. A long position indicates a rising price level.
Short squeeze
Because the Euronext Matif futures market has a physical delivery obligation, it is important that traders close their open positions before this date looms. After all, no trading office or speculator benefits from having to drag wheat across the globe. Often the participant does not even own wheat and the buyer can be anywhere. Buyers, on the other hand, sometimes want to receive the wheat if they are professional parties. There a discrepancy arises.
To prevent this, a stop loss order is concluded. If the wheat contract reaches a predetermined price level where this stop loss level is, the trading system automatically buys back the short contracts. This action causes the price to rise further. This results in more and more levels of automatic trading being reached, creating a snowball effect. More and more short positions have to be bought back. The price can skyrocket in a short time. The participants are 'squeezed' from their positions. Hence the term short squeeze.
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A short squeeze on the rapeseed contract on the Matif on April 29
Looking at the price of the December contract, we see a much more stable price trend that better matches the international grain markets. This is also reflected in the net long positions at Euronext. Non-commercial parties have expanded their net long positions, according to data from Wednesday, September 25. Commercial parties have also expanded their long positions in wheat.
Quality issues
Can the price fall be described as purely technical? Not quite. What plays a role in the short term in the EU - and especially France and Germany - is the quality of the wheat. It is simply (significantly) disappointing due to persistent precipitation and a lack of sun during the flowering period. Despite a reduction in quality by the French, it is difficult to find wheat with sufficient 'milling specs'. Romania can currently serve most customers. Looking at the long(er) term, a wheat market between €225 and €250 per tonne is realistic for this season. This price level already includes all the ingredients (disappointing yields, quality, Russian export tax, expensive freight costs). New impulses are clearly needed to steer the market up or down. There are none at the moment.