11-04-2014 09:38 AM | Arable, Cereal, Crops, Market Reports, News

Sterling strength caps upside potential for UK wheat



EU grains closed mostly a little lower, although May 14 London wheat bucked the trend closing GBP1.30/tonne higher at GBP167.45/tonne, new crop Nov 14 ended the day GBP0.15/tonne lower at GBP156.00/tonne. May 14 Paris wheat closed down EUR0.75/tonne at EUR208.25/tonne, Jun 14 Paris corn was EUR0.50/tonne lower to EUR188.25/tonne and May 14 Paris rapeseed was unchanged at EUR415.50/tonne.

The hangover from last night's USDA report, which came in bearish for wheat, was carried over into today's session. Forecasts for rain winter wheat on the US Plains this weekend, and more to come in the second half of next week, added to the bearish tone.

Early spring grains planting in Ukraine are off to a flyer, despite the problems with Russia. The Ukraine Ministry today reported plantings were completed on 2.77 million hectares - which is just about the entire forecast area and a more than fourfold increase on this time a year ago.

Sterling strength caps upside potential for UK wheat. Whilst we might not have anything to export this year, we certainly will in 2014/15. The pound traded close to 1.68 against the US dollar today - it's best level since August 2009 - following a statement from the US Federal Reserve saying that interest rates in the States would remain "very low" for a considerable time to come. Sterling's gains were trimmed a little as the Bank of England left UK interest rates on hold, and where they've been since March 2009, at 0.5%.

Some expect that UK interest rates will start to edge higher by mid-2015, and possibly even later this year, with sterling forecast by Citibank to hit 1.70 against the dollar and 1.25 versus the euro in Q4 of 2014.

That could keep corn imports continuing awhile yet, to the detriment of wheat prices and export potential in 2014/15.

Fears for the Chinese economy and the country's "unsustainable" growth have been around for so long that we've maybe become complacent about them, just as were were about house prices, subprime and the dotcom boom.

Reuters reported today that 5-6 soybean vessels are sat portside in China, unable to unload due to difficulties with buyers obtaining Letters of Credit from the banks. There's a further similar number en-route to China that may also face a similar fate, they said.

With fund money now sitting on a very large speculative long in soybeans and corn in Chicago, the last thing the market needs is to start hearing of Chinese defaults. A major fund sell-off, should it come, would leave the soybean market vulnerable to significant downside. A steep fall in prices is not an unimaginable scenario (US farmers are of course about to plant a record soybean crop of their own in 2014, and Brazilian growers look set to do likewise later on in the year), and one that would only spark further defaults driving prices even lower.

In the event of such a scenario playing out, it would be difficult to imagine wheat prices rising, at least not without the help of a significant weather-related problem somewhere around the world. Particularly so in the UK if the pound continues to firm once we start bringing in a crop which is hoped to be in the region of 15 MMT whilst we're up to our necks in imported corn.

It was spec money that got us where we are today, following Big Bad Vlad's move on Crimea. It was nothing to do with end-user demand (and maybe only a little related to drought on the US Plains). What happens if the "smart money" suddenly decides that it wants out (again) is not too difficult to forecast.

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