Get Ready for Wheat Market Volatility
Historically, spreads of this magnitude have often preceded major price moves. During the time period studied, increases in the high/low spread were positively correlated with rises in price volatility. When the HRW spread exceeds $10/MT, the average FOB price tends to experience a week-over-week decrease of $10/MT or more at least once in the following six weeks.
As of 23 August, the SRW spread was $5/MT, a drop from $10/MT the prior week and $14/MT for the preceding two weeks. Similarly, the HRW spread fell to $9/MT from $14/MT earlier in the month. WPI’s analysis suggests the wheat export market could experience price volatility and rapidly evolving market conditions in the coming month. The widening spread may be indicative of traders’ uncertainty over which direction the market is heading, resulting in a wide range of traded prices. Once the market gains directional clarity, prices tend to quickly adjust to the new information.
Given today’s market dynamics, there are several factors that could influence U.S. wheat export prices. Global supply surpluses for feed grains and wheat have maintained a bearish tone for the markets, and any factor that adds to supply could cause a more precipitous fall in prices. December Chicago wheat futures put in new contract lows on 25 and 26 August as the International Grains Council increased its expectations for world wheat production. A bullish scenario is hard to imagine, but Europe’s wheat crop is having quality issues that may similarly be found in the Black Sea production. Additionally, with the Black Sea regions’ status as the global wheat supplier, any geopolitical instability there could pressure prices upward.
(This article was originally published in the 29 August 2016 issue of Ag Perspectives as an analysis by Matt Herrington. Click here to find out more about subscribing to Ag Perspectives.)