While WTI crude oil quietly slipped out its recent range and gold found its footing all the focus was on the continued surge in the price of wheat and the possible implications for the price on anything from biscuits, bread, poultry to beer.
The “perfect storm” currently ravaging the wheat market has so far driven prices in Chicago up by 80% to a 23 month high this past month and it gained further momentum on Thursday as news broke about the Russian export ban. This has left the market exposed to further price increases as wheat importing nations from North Africa to the Middle East will have to look elsewhere for their supplies.
The Russian export ban was implemented amid the worst drought for half a century which has hurt the wheat growing region around the Black Sea. The ban caught the market by surprise as many would have thought that Russia would have used government inventories to complete export sales. It will run until December at which point they will have a good idea about the output from the all important winter wheat.
The current crop being hurt is the spring wheat which counts for less than 20 percent of total wheat production in the most affected areas. The all important winter planting period begins mid August and runs into September. If the dry weather conditions persist planting could be delayed or worst case not going ahead at all. This uncertainty will be keep prices supported until a change in weather occurs around the region.
On a positive note it is worth mentioning that the U.S. wheat crop looks good and a near record production is expected adding to already existing inventories. U.S farmers should therefore be able to handle the shortfall from reduced production elsewhere. However given existing trade barriers with some of the countries left short from the Russian export ban it is not as easy as it might seem to plug the hole.
The impact from the price rises this past month has already been felt on other stable sources of food such as rice, corn and soybeans and also barley which is used both as animal feed and beer production. The export ban has given commodity trading firms, who acts as brokers between sellers and buyers of wheat, the opportunity to renege on signed contracts to supply at much lower prices. This is now putting pressure on food and beverage companies who find themselves on the losing end of those reneged contracts.
European food and beverage companies, as measured through the STOXX 600 Food index, have lost 7.25 percent in value since this latest crisis emerged and the sell off accelerated after the Russian ban. During this same period the overall Euro STOXX index over leading European companies have rallied 7.25 percent.
The risk now, should wheat prices stay elevated for a while, is for Corn prices to come under some upside pressure. High wheat prices will tempt U.S. farmers to switch from Soybeans and corn to winter wheat production leaving the inventory situation somewhat uncertain given the already increased demand for corn in ethanol production combined with new demand as a feed substitute to wheat. The corn to wheat ratio has moved from 0.75 down to 0.50, a wheat outperformance of 33 percent. Once the situation stabilizes this trade should favor corn as wheat prices should suffer. Until we find a plateau in the market fear will be the main driver with high volatility expected.
The energy sector had a quiet but positive week with crude oil rising above 81 dollars, a three months high, due to among others:
- Weaker dollar helping dollar based commodities. The dollar index has been toying with the 200 day moving average all week with a move below signaling further weakness.
- Surge in North Sea Brent crude from lower production due to maintenance. At one stage it had outperformed the WTI by 1.75 dollars in just a couple of weeks before arbitrage trades kicked in buying WTI and selling Brent.
- The speculative long position still relatively small leaving additional room to the upside.
Meanwhile the process of bringing crude onshore from floating storage continues with inventories at Cushing, Oklahoma, the delivery hub into NYMEX WTI having swelled to 37.8 million barrels which is only 100,000 short of the previous record from May. The forward price of crude is now so close to the spot that the buy and hold on floating storage is no longer financial attractive.
The impact of this on the tanker market is clear to see from the number of VLCC, Very large crude carriers, looking for tenders. The vessel availability is at a six year high and daily rates being paid for hiring a VLCC from the Arabian Gulf to Japan has collapsed to 6,500 dollars. As shipping companies barely break even at these prices certain VLCC owners have responded by taking vessels out of service and anchoring them until the situation stabilizes.
Technically a new uptrend has been established with resistance now at 83 ahead of 85.25. Support is at 80.80 followed by 79.70 and 75.90.
The month long correction in Gold seems to be over as buyers re emerged on the back of dollar weakness and a pickup in physical demand with Ramadan and the Indian wedding season approaching. The important 200 day moving average support at 1,150 held and will be the focus point for any future corrections. In addition China this week announced that they would relax trading rules for gold which could help increase investor demand from the region.
A slowing U.S. economy could prompt the Federal Reserve to expand monetary easing measures once again with a weaker dollar and higher gold price a potential consequence. The monthly unemployment report highlighted this risk as there are no signs that the labour market is being boosted and as a consequence there are risks of falling consumer confidence and spending in the next few months.
Investors in Gold ETFs continue to show loyalty and resilience with holdings only down by 1.8% during this recent 100 dollar sell off. At the same time we have seen silver outperforming gold which has also helped the market to stabilize.
Technically the move back above 1,200 signals a retest of the July high at 1,218 followed by 1,225. Support levels can be found at 1,188 followed by 1,166.
Commodities in general have had a mixed week with the Reuters Jefferies CRB index, at the time of writing, being flat on the week bringing gains this past month close to nine percent. Of the 26 most active commodities all but five trades above their 200 day moving average. The dollar weakness these past few weeks has played a good part in this performance and therefore has to be watched closely in the coming days.
One of the exceptions to the positive performance has been the price development of Cocoa with prices falling both in London and New York. The price of London Cocoa trades at a two month low some 17 percent lower from the July high reached around the frenzied expiry of the old July contract where a London based hedge fund took delivery of 241,000 tons.
Production from the Ivory Coast and Ghana, the two biggest growers, usually begins in October with growing conditions currently being described as good.
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