The Prospects Of Wheat

| About: Teucrium Wheat (WEAT)

Summary

Russia and Ukraine will conduct aggressive trade policy on the wheat market.

Wheat stocks in the United States are going through the roof.

The money managers are increasing the size of the net short position.

The concerns regarding the weather problems that accompanied last year's autumn sowing company in Russia did not materialize. According to the current USDA forecast, in 2016/17 Russia will collect 64 million and export 25 million tons of wheat, becoming a world's leading wheat exporter. Evaluations of the local consulting companies are similar. The United States will be the second with 24.49 million tons.

The ending stocks of wheat in Russia will reach 8.63 million tons at the end of 2016/17, which is the highest result over the past 5 years. The domestic consumption will remain almost at the last year's level, i.e., there is not even a theoretical possibility of a wheat shortage on the Russian domestic market. In the meantime, against the background of the fall in oil prices, there is a deficit of "export dollars" in Russia, which means you can safely predict Russia's aggressive trading strategy on the world wheat market in the subsequent semester.

But this is not the worst thing for the global wheat market. In the fall 2015, Ukraine witnessed a full scale drought, as a result of which the farmers reduced the sown area by 12% YOY, therefore, the yield is expected at the level of 4.27 t/ha. The forecasts of the local consulting companies reach 5.12 t/ha. Thus, the 2016/17 harvest in Ukraine, projected by the USDA at the level of 24 million tons in case of the yield of 3.75 t/ha, will probably be revised upward in the future. The economic situation and the stability of the national currency in Ukraine also leave much to be desired, so in the fall we will see rather aggressive exports policy.

Source of data: USDA

The peak export activity in Russia and Ukraine accrues to September-October, which means the American wheat will face tough competition from these countries soon. And, although the first figures of the American exporters' trading activity in the current marketing year show a strong external demand, I am not sure about its future stability.

Source of data: USDA

The latest information on the status of the wheat crops in the United States, provided by the USDA, dispels all doubts in the projected yield at the level of 48.6 bushels per acre. According the USDA, as of June 1, the estimation of the accumulated wheat and corn stocks has already updated its multi-year records. If the current forecast works well, the total space required to store the ending stocks of wheat, corn and soybean in the United States in 2016/17 will increase by 4.3% YOY. I saw the information that some American farmers are forced to store the harvested wheat in the open air, hence, they will probably not be tempted to wait for better prices.

Source of data: USDA

In June, the money managers increased the size of the net short position by 111%. In my opinion, they have no compelling reason to rush into locking in profits under these contracts - there is enough time.

Source of data: Saxo Bank

Conclusion

The only thing that now keeps wheat from an even larger fall is possible weather-related troubles during the ripening of corn. Therefore, probably, the September wheat futures will not drop below $4.20 in the next month. However, I don't see the reasons for a significant growth in this market in the foreseeable future.

Unless otherwise noted, all charts included are my own.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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