Politics, weather boost wheat prices

Mar 28, 2014

U.S. wheat futures closed higher the week ending Mar. 21 on concerns about deteriorating crop conditions in the southern U.S. Plains.

According to the U.S. Wheat Association, strong export demand supported markets, including a soft red winter (SRW) cargo purchase by Egypt. Worries about how political tensions in the Black Sea region might disrupt grain shipments helped push futures even higher, the association said.

All three nearby futures contracts closed at a 10-month high on Wednesday, Mar. 12. A stronger U.S. dollar limited gains late in the week. KCBT May wheat gained 20 cents on the week to close at $7.71/bu. MGEX added 9 cents to $7.43/bu and CBOT increased 6 cents to $6.93/bu. CBOT May corn fell 7 cents to $4.79/bu and CBOT May soybeans added 20 cents to $14.08/bu.

The first week of March, U.S. wheat futures rose 4.6 percent, the biggest one-day percentage gain in more than 17 months. Corn also saw a gain early in the month, when March delivery rose 1.4 percent to $4.64 a bushel. Analysts said Ukraine’s escalating conflict and decrease in grain exports from the area were the leading factors in the climb. Speculation was high on an expected shift from Ukraine producers— one of the world’s largest grain exporters—to U.S. producers.

USDA expects Ukraine to be the world’s fifth-biggest exporter of wheat by volume and the third-largest shipper of corn this year. The country sells much of its grain to Egypt, the world’s largest importer of wheat, and to other Middle Eastern countries and Africa.

According to Casey Chumrau, USW Market Analyst, the Ukraine unrest is not the only driving factor in the month-long uptick in wheat futures process.

“Each week, many headlines pointed to political instability in Ukraine as a key factor in the run-up. There is little doubt that the market was factoring in some concern over the political situation in a country that captured 6 percent of the world wheat market in 2013/14. But the primary fuel for a 15 percent increase in the Kansas City Board of Trade (KCBT) May hard red winter (HRW) wheat contract in just 13 trading days include real fears about droughts around the globe, potential freeze damage in the southern U.S. Plains and position changes by the big index funds,” Chumrau shared.

USW believes speculation and uncertainty are driving the market reaction about Ukraine. The facts seem to tell the story—at least for now.

According to Chumrau, export operations are still normal in Ukraine. The Ukrainian Agriculture Ministry released its monthly export report Mar. 19 showing no indication that grain shipments suffered in the last four weeks.

The political turmoil has not hindered old crop wheat sales, according to Chumrau, and should not significantly disrupt or decrease 2014 new crop production. “Financial fallout from the crisis could make spring planting difficult, but that represents only 5 percent of Ukraine’s crop, on average, so the majority of the crop will be ready for harvest in June or July. Crimea is not a major wheat-producing region so any lost planted area there would have little impact on global supplies,” she said.

Chumrau added that the real concern in the United States, Ukraine and even southern Russia is drought. “Once more, we are reminded that in the world wheat market, precipitation is always more important than politics.”

The grain export topic is not the only concern relating to the Ukraine conflict. Heavy dependence on Russian gas for several of the 28 EU nations is creating another concern.

President Barack Obama said last week that a trans- Atlantic free trade deal would allow the EU to reduce its dependence on Russia. Currently, the EU imports more than a third of its gas from Russia.

“Once we have a trade agreement in place, export licenses for projects—for liquefied natural gas destined to Europe—would be much easier, something that’s obviously relevant in today’s geopolitical climate,” the president said.

Requests for the U.S. to export natural gas to Europe were followed with concerns over higher gas prices in the states.

Lithuania’s Energy Minister Jaroslav Neverovic pleaded in emotional terms for U.S. help, saying his country is “100 percent” dependent on Russia for natural gas and has to pay 30 percent higher prices for it than other countries in Europe.

Experts say exporting more gas might lead to slightly higher gas prices in the U.S., but becoming a major exporter would also give the U.S. new geopolitical clout in the coming years. The first approved LNG export terminal at Sabine Pass, LA, is scheduled to begin operations late next year; there are two dozen other pending export applications in the works.

Officials hope to conclude the Trans-Atlantic Trade and Investment Partnership, or TTIP, negotiations by the end of the year. The combined trade between the United States and the EU accounts for almost half of the world’s gross domestic product and a third of world trade. — Traci Eatherton, WLJ Editor