Calling A Top In The Wheat Market

15/01/11 -- I got invited to speak to a group of agri-reps a few months ago, my brief being to explain to them where the grain markets were currently at, and where they were going. I told them that it was a bit like trying to pick the winner of the Grand National months before the race, when you don't even know the going or the weights or anything.

Calling a top in the wheat market isn't exactly an easy thing to do, but there's no harm in trying is there?

I've said for a while now that I quite fancy May, and I'm still reasonably content to go with that. Here's a bit of a rationale behind my thinking.

It's seems pretty clear that UK and EU exports are running well ahead of themselves, and that availability is going to be tighter than a duck's you know what come the spring. So it seems a bit strange not to think that prices will peak in July, just before the harvest kicks off.

Certainly that is what the London futures market seems to be indicating, with July the only month to close above GBP200/tonne on Friday, and there then being a steep GBP32.75/tonne decline into new crop November.

Historically however there is a strong precedent for UK wheat prices to peak before new crop comes along, in May. Having searched the Internet high and low for a chart to back this theory up, and drawn a blank, there was only one thing for it - to gather the information necessary and produce one myself. And here it is:

As you can see, that chart is based on the last twenty years worth of information. It seems that the impending threat of harvest is frequently enough to get the market into decline well before July comes along.

I can already hear you saying, yes Nogger that might happen in a "normal" year when we are clearing the decks and trying to make room for new crop, but 2011 is not a "normal" year. And you may well be right, and there is no denying it - unless you are Defra of course.

So here's a few things to consider in this abnormal year:

1. Hefty compound feed price increases are on the cards come May. If the livestock sector can't afford current levels they certainly aren't going to fancy stumping up what's likely to be thrust in front of them in late spring.

2. Livestock numbers are in decline as producers the world over up slaughterings on the back of soaring feed costs.

3. The slump in demand associated with turnout time could be particularly acute this year I feel.

4. I wonder idly outloud if our chums at a leading grain merchant have a significant volume of old crop wheat put to one side with "new bioethanol refinery - DO NOT TOUCH" written on it. If so, and if/when it becomes clear that said refinery isn't going to be ready to open during the current crop year then that could mean a ruck of wheat coming back onto the market. May/July is the premium position after all, so it would make no sense whatsoever to carry it into Aug/Oct would it?

5. The US wheat harvest will have started in the south by May, and despite market rhetoric US stocks are already very comfortable - the second highest in the past decade in fact.

That's my thoughts on the matter anyway.

Oh, I almost forgot....Becauseicouldntsee 30/1 on Betfair for the Grand National. Nailed on cert that is!