- In its monthly WASDE reports, USDA continues to lower global wheat ending stocks for 2023-2024 creating a great deal of hubbub about bullish wheat supply and demand.
- Yet a look at Barchart's Cost of Carry table shows us Chicago wheat futures spreads continue to run near 100% full carry, an incredibly bearish read on real fundamentals.
- How do I reconcile this difference? I don't, because I don't have to based on Newsom's Market Rules #6 and #2.
As you probably know, I had the opportunity to speak at Barchart’s Grain Merchandising and Technology Conference in Nashville, Tennessee this past Monday. I shared the stage with Mark Soderberg of ADM Investor Services as we presented two different views of looking at market fundamentals. Mark discussed a variety of government numbers including NASS’ weekly crop conditions (and yes, I was nice, not pointing out the Browning Effect clearly visible on his charts), CFTC Commitments of Traders (though not the legacy, futures only I use in my analysis) and USDA’s monthly supply and demand estimates. As you would expect, my part of the discussion focused on cash indexes, basis, and futures spreads for corn, soybeans, and wheat.
When it came time for Q&A (always my favorite part of any market discussion), there were a number of interesting questions for both of us. The one that stood out to me as asked by a gentleman in the front row, “How do you reconcile your bearish view of Chicago wheat with the bullish numbers USDA continues to release?” It was a great question and cut to the core of what I talk about in this space (and just about everywhere else I’m asked to participate). I had opened my presentation by stating Newsom’s Market Rule #6: Fundamentals win in the end. This set the stage for both out presentations, and the gentleman’s question to follow.
For my answer, I illustrated the difference between real fundamentals and estimates (aka educated guesses) on supply and demand. The market provides the former, USDA is more than happy to contribute the latter. While the majority of the industry, at least the industry that does all the talking (bringing to mind Chinese philosopher Lao Tzu’s quote, “Those who know do not speak. Those who speak do not know.”), prefers to regurgitate USDA numbers of all shapes and sizes, there is a small sect of us who choose to study what the markets have to say about supply and demand.
To that end, my initial answer was, “I don’t (have to reconcile)”. That’s how I choose to look at it. I truly do not care what USDA has to say, and given I am no longer in the press box I don’t have to cover it much these days. For the record, Tuesday saw the release of USDA’s September Supply and Demand estimates with no changes made – none – to the domestic (US) table. I find this interesting. Why? Because it again shows USDA is more interested in entertaining than informing. Knowing nobody would be looking at wheat, the spotlight burning bright on corn and soybeans (as is usual for September), that’s where all the games were played. Some folks have taken the time to point out to me there was a 7 mmt drop in global ending stocks estimates for 2023-2024, so therefore the report was bullish. My reply is as it always is, so what? The world isn’t running out of wheat any time soon.
How do I know this? It’s simple: The December-March Chicago (SRW) wheat futures spread closed last Friday at a carry of 26.0 cents and covering a whopping 98.7% calculated full commercial carry[i]. At Monday’s close the spread showed a carry of 26.25 cents and covered roughly 99.5% cfcc. After Tuesday’s “bullish” USDA guesses were released, the same spread closed at a carry of 26.5 cents and covered 100% cfcc. Again, the commercial view of Chicago wheat grew more bearish AFTER USDA released its “bullish” guesses. Think about that for a moment.
Why then has Dec Chicago rallied off its new low of $5.70, a price that was hit following USDA’s September reports? If we go back to last Friday’s CFTC Commitments of Traders report (legacy, futures only) we see noncommercial traders held a net-short futures position in Chicago of 46,410 contracts as of Tuesday, September 5. From last Tuesday’s close through this Tuesday’s low ($5.70), Dec Chicago dropped another 29.25 cents with some of the pressure likely coming from continued noncommercial selling. Why did the market rally? Funds started covering short positions. It’s that simple. It wasn’t some huge fundamental shift in the market. It likely has had little to do with Russia’s ongoing invasion of Ukraine[ii] as the world quickly reshuffled wheat’s supply and demand deck, with the US dealt out for the most part.
As I said before, I don’t have to reconcile differences between what the market says and what USDA releases. In the end, the only opinion that matters is the markets’, or as Newsom’s Rule #2 tells us: Let the market dictate your actions. Everything else is just noise.
[i] Calculated full commercial carry is the total cost of holding grain, storage and interest, in commercial storage. As I said at the meeting, I spend much of my time these days studying Barchart’s Cost of Carry tables.
[ii] Those headlines popped up again Wednesday. For the record, the Barchart National SRW Wheat Price Index (ZWPAUS.CM) has lost $4.1150 since the end of February 2022, and $7.41 from its high posted in May 2022, through the September 2023 low registered Tuesday. Additionally, the nearby futures spread has gone from 6.0 cents carry (44% cfcc) to the aforementioned 26.5 cents carry (100% cfcc).
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
