Wheat futures may be being punished a bit too harshly.

With pressure to absorb from the northern hemisphere harvest, and the wave of supplies it brings, besides the reopening of Ukraine’s ports to grain exports, it is not so surprising that prices sagged.

Chicago prices, on a spot contract basis, sank by more than 40% from their mid-May high to their closing low of $7.59 a bushel set late last month.

What is less deserved is that they have not managed any recovery since, as have many other major ag contracts, including corn and, especially, soybeans.

Still tight

Sure, Russia’s ongoing harvest is beating expectations, and Australia looks ever-more likely to post a third successive bumper crop too.

Indeed, the US Department of Agriculture on Friday upgraded by 8.0m tonnes its forecast for the 2022-23 world wheat crop taking it to a record high.

But the revision didn’t shift the needle much in terms of boosting supplies. With expectations for consumption lifted too, the world stocks-to-use ratio, at 34.1%, edged only 0.2 points higher from last month’s estimates, and remained down 0.7 points year on year.

Factoring in only inventories in the top exporting countries – Argentina, Australia, Canada, the European Union, Russia, Ukraine and the US – whose supply levels are particularly important in price determination, and the ratio of stocks to world use didn’t shift at all, staying at 6.8%.

That is the tightest for years, and in fact the same ratio as the USDA was forecasting in May, when Chicago prices were 50% above current levels.

Record fund selling

Indeed, the price decline has caught out the USDA itself.

The department, cutting by $1.25 per bushel to $9.25 per bushel its forecast for average domestic farmgate prices in 2022-23, as started in May in the US, said that the downgrade was “based on prices received for marketings to date, which are lower than previously expected”.

But the USDA could not have foreseen the extent of the hedge fund selldown which looks a big factor in keeping wheat prices under pressure.

In the week to last Tuesday, funds completed a 12th successive week of net selling in Chicago wheat futures and options – taking the spree to the longest on records going back to 2006.

The selldown has driven the managed money position in wheat from a 14-month high of 26,586 lots in May, as prices were peaking, to a net short of 20,348 contracts as of last Tuesday.

Too short?

A big question is whether that selling is justified.

It may fit with funds’ broader investment strategy, perhaps of shifting away from agricultural commodities, and the story of the grain price squeeze, towards other priorities.

But it has certainly left wheat prices vulnerable to something of a price spike, should negative supply news force short-covering.

Corn signal

One factor for investors to keep an eye on is the large narrowing in the premium over corn prompted by wheat’s recent underperformance.

December basis, that gap has narrowed by nearly two-thirds since May, to $1.79 a bushel as of Monday, the lowest in more than a year.

While this may be justified by waning corn output prospects in the US, and moreso in the European Union, there are limits to how far that trend can go before driving more feed demand to wheat which balance sheets can hardly afford.

Corn futures have, while suffering a setback on Monday from an improved US weather outlook and poor Chinese economic data, are still well above late-July lows, having managing some recovery even with the US harvest approaching. Don’t expect wheat prices to remain in the doghouse compared with corn for too much longer.