Todd's Take

Mr. Market Interrupts Bull Move in Wheat Prices

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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On Monday, May 16, July KC wheat closed limit-up after India's government announced it was banning wheat exports over the weekend. On Tuesday, July KC wheat posted the highest close ever for the July contract. By Thursday, the July contract had dropped 72 1/2 cents to $12.95 1/4, largely due to panicked selling in the stock market -- erratic behavior that suggests medication may be a suitable treatment option. (DTN ProphetX chart by Todd Hultman)

One of the main duties and pleasures of a DTN market analyst is to inform and explain the market's moves each day, and I have to say this week's price moves added a new chapter in volatile market behavior. With market influences becoming increasingly complex, this seems like a good time to remind readers of Mr. Market.

As Omaha investor Warren Buffett explained in his 1987 letter to shareholders of Berkshire Hathaway (…), Mr. Market was a creation of his mentor, Ben Graham, used to help explain the proper way to look at markets. Mr. Market is described as a poor fellow with incurable emotional problems, sometimes given to bouts of euphoria and at other times, so hopelessly depressed that he can't imagine the sun ever rising again.

Usually, it takes some time for Mr. Market's mood to switch from one extreme to the other. But this week, we saw a back-to-back display of Mr. Market's bipolar moods in wheat.

On Monday, May 16, new-crop contracts of all three U.S. wheats closed up their daily limits after India's government announced a ban on wheat exports. India's crops have been hurt lately by a chronic heatwave, and U.S. wheat crops are struggling with drought in the southwestern Plains and hostile planting conditions in the Northern Plains. Crops in northern Europe need more rain and the same may be true in China.

On Tuesday, July KC wheat closed at $13.67 3/4, the highest close ever for a July contract, just as the Wheat Quality Council's Hard Red Winter (HRW) Wheat Tour was getting underway. By Thursday afternoon, the tour would announce a wheat production estimate for Kansas of 261 million bushels (mb), down from last year's 364 mb. As USDA has been correctly warning, drought in the HRW wheat region is for real.

With world wheat supplies already tight from last year, Russia is keeping up its attack on Ukraine, while major wheat regions are encountering threatening weather and high fertilizer prices. The concerns about world wheat supplies being insufficient in 2022 are legitimate. It is difficult to imagine a more bullish set of circumstances.

The very next day after July KC wheat posted its highest close on record, prices promptly fell 72 1/2 cents the next two days as noncommercials couldn't get out of their long positions fast enough.

Was there some shocking wheat news revealed? Did someone discover a long, lost underground storage facility of wheat somewhere?

No. Wednesday's selling in wheat was triggered by Mr. Market's anxiety attack in the stock market as the Dow Jones Industrials plummeted over 1,100 points. Not only have concerns been building about rising energy prices and a tighter Fed policy being sought to restrain inflation, but investors were also horrified to discover Walmart only earned $2.05 billion in the first quarter and Target's net income came in at just over $1.0 billion for the most recent quarter.

Oh, the pain of it all! The whole economy is going to hell, concluded investors and widespread selling gushed across the commodity board as well.

As a market analyst, it is difficult to compare the situation of some of the poorest nations in the world facing the task of having to pay sharply higher prices for limited supplies of wheat that many of their people need to survive in 2022 versus hedge fund managers panicking because they're going to miss their quarterly bonuses. But in the land of noncommercial behavior, this is how the world works and it helps to keep Ben Graham's view of Mr. Market in mind.

To try to keep our feet on the ground, here is a snapshot of the complex situation markets currently face. U.S. oil production remains paralyzed by massive financial losses the industry suffered in 2020 and is still 1.1 million barrels a day short of where it was before the pandemic. South American drought is limiting corn and soybean production in 2022, keeping U.S. exports active and U.S. supplies low.

The war in Ukraine is not only robbing the world of one of the top exporters of wheat, corn, barley and sunflower seeds in the world, it is also driving up oil and gas prices in the U.S. as Europe looks for ways to become less dependent on Russian fuel -- a task that Europe has neglected for years and is not prepared for now.

Fertilizers were already expensive before the war on Ukraine, but the situation is even worse now as rising energy prices and war-related sanctions have made fertilizers more scarce and more expensive throughout the world. The obvious result is higher food production costs and less production anticipated in 2022.

Those same rising energy and food prices are fueling inflation concerns in the West and have pushed the Federal Reserve into a more hawkish stance. Federal Reserve Chairman Jerome Powell has taken a lot of criticism for not raising interest rates sooner. But the more obvious point is that raising interest rates won't increase oil production, cause crops to grow in dry soil, dry out flooded North Dakota fields or allow Ukraine to grow and export grain through the Black Sea.

Perhaps a better prescription than higher interest rates for what ails markets would be some actual prescriptions. It wouldn't hurt for Mr. Market to calm down a little and there is one other unstable actor on today's world stage that could use some strong medication; until the war ends and we all find a way to become more energy independent, it's going to be difficult to unravel the tangled mess of problems the markets currently face.


Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

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Todd Hultman