- Weather-related supply shocks have compounded to send wheat prices soaring higher "Wheat prices have rallied dramatically over the past month, with the Sep-10 CBOT contract up more than 76% and trading near $7.80/bu from a $4.40/bu level at the end of June. The main driver behind this rally has been growing concerns for the Russian 2010/11 crop as hot and dry weather is significantly damaging grain production. This supply shock,
combined with a low planted acreage in Canada due to excessive rain, has led the market to swiftly reprice its expectation for an inventory build into a deficit for the 2010/11 crop year."
- Prices have likely overshot as high beginning stocks and feed substitution should absorb some of this supply shock… "The velocity and magnitude of this price rally have been exacerbated by a near-record net short positioning coming into this weather shock and we expect ongoing production uncertainty to continue to lend support to prices in the near term. However, the current situation is very different from the 2006-08 wheat bull market as we are coming into this production disruption with elevated wheat inventories, especially in the US. Accordingly, barring further major deterioration in crop production, we
would expect lower wheat prices once the market gains a better grasp on this year’s wheat production and deficit. Acknowledging the current production issues we are revising our forecasts higher to 650 cents/bu from 550 cents/bu previously."
- … but still too early to fade this wheat rally "We would look to implement our bearish wheat view with low-cost option strategies such as put spreads, but expect near-term price action to offer better entry levels. These developments in the wheat market comfort us in our long-held constructive corn view as wheat-to-corn feed substitution will likely further support already strong expected corn demand."
combined with a low planted acreage in Canada due to excessive rain, has led the market to swiftly reprice its expectation for an inventory build into a deficit for the 2010/11 crop year."
- Prices have likely overshot as high beginning stocks and feed substitution should absorb some of this supply shock… "The velocity and magnitude of this price rally have been exacerbated by a near-record net short positioning coming into this weather shock and we expect ongoing production uncertainty to continue to lend support to prices in the near term. However, the current situation is very different from the 2006-08 wheat bull market as we are coming into this production disruption with elevated wheat inventories, especially in the US. Accordingly, barring further major deterioration in crop production, we
would expect lower wheat prices once the market gains a better grasp on this year’s wheat production and deficit. Acknowledging the current production issues we are revising our forecasts higher to 650 cents/bu from 550 cents/bu previously."
- … but still too early to fade this wheat rally "We would look to implement our bearish wheat view with low-cost option strategies such as put spreads, but expect near-term price action to offer better entry levels. These developments in the wheat market comfort us in our long-held constructive corn view as wheat-to-corn feed substitution will likely further support already strong expected corn demand."
GoldmanSachs Agriculture Update 20100806
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