Markets, commodities included, hate the element of surprise. And few things have caught commodity markets off-guard this year like the on-again, off-again talk of plans by the world's third largest wheat producer, Russia, to curb grains shipments.
Each suggestion of supply tightness in wheat has lit a new flame under a crackling market that is already up 27 percent year-to-date. Sell-offs ensue when rumors are found to be untrue, before more gains come on fresh speculation, resulting in one of the most volatile times ever for prices of the staple.
Traders are sensitive to any hint of a Russian squeeze on grains supplies, after the country imposed a full ban back in 2010/11 following a severe drought, sending global prices surging.
With droughts now causing unexpected damage to wheat crops in European Baltic Sea countries and Australia, the market is on tenterhooks that a Russian export crisis could follow. There have been doubts about Russia’s capacity to meet its forecast for 35 million tonnes of wheat exports in 2018/19 due to an anticipated drop in production and brisk shipments since the start of the season.
Russia Officially Denies Rumor
Even so, Russia’s agriculture ministry denied plans to curb grains shipments when it met exporters to discuss loading volumes on August 17. Traders, including some of those attending that meeting, said earlier that the ministry is set to consider curbing 2018/19 exports at beyond 30 million tones, to satisfy a request from meat-producing regions.
While no further explanation was provided on that request, the speculation was enough to send wheat prices rallying 6 percent over two sessions before the meeting. The market did give back all of those gains in the two sessions that followed the official denial from the agriculture ministry.
In Wednesday’s session, talks of a fresh Russian bid to stall grains exports were back, driving wheat 4 percent higher this time and helping corn charge higher too. “There is nothing like a good rumor to get the hearts of the bulls pumping once again,” said Dan Hueber, author of The Hueber Report on grains.
Speculation Of Export Curbs Continues
“It would seem this is the third, or maybe fourth, time this story has been resurrected, which makes one almost think that where there is smoke, there could be an actual fire,” Hueber wrote, referring to the renewed speculation over Russian export restrictions.
“Of course, after one of the previous incarnations, exporters seemed to take the news to heart and appeared to really push as much product into the export channel for fear of being cut off later, which in turn resulted in the recent breakdown in prices.”
Commonwealth Bank analyst Tobin Gorey, in a report published August 21, said rumors about Russia’s wheat restrictions came from a number of sources. “One is simply that Russia has ‘form’ (or precedent), banning and taxing exports in the past when supplies have been skinny,” Gorey wrote.
“Two is that supplies are again slimming. Russia’s wheat production likely fell around 20 million tonnes in season 2018. And, even with considerably less exports, Russia’s wheat inventories are very likely to decline to low levels. Together, the two are fertile ground for such rumors.”
Export Estimates Barely Changed
Despite the speculation, Hueber said Russian wheat export estimates for the current season had barely changed at 32.5 million metric tonnes, while overall crop estimates had been trimmed by a little over 1 MMT to 69.6 MMT.
While the country needed to balance its grains exports and serve domestic needs, Gorey said that for Russia to stop wheat exports now would be akin to “shooting themselves in the foot.” He conceded, however, that Moscow “may have a different view, come December or January.”
“We think there is a good chance this latest episode will not be the last of the Russian export rumors,” he added.
At Wednesday’s settlement of $5.4125 per bushel, wheat for December delivery on the Chicago Mercantile Exchange was deemed a “neutral” holding by Investing.com’s daily technicals.
We “have no illusions of grandeur, we are and remain bullish the wheat market longer term and will be looking for the current correction to breed a new smart money buy-signal to recommend purchases again,” said Shawn Hackett of Hackett Financial Advisors in Boca Raton, Florida. “For now, all we can do is be patient and wait for the timing to be right.”