- Late Sunday/early Monday saw headlines emerge regarding the Biden Administration giving its okay for Ukraine to launch long-range missiles into Russia.
- This sparked an immediate rally in wheat futures, a move that carried over into Tuesday's session as well.
- The question these developments raise is if a change has occurred in global wheat supply and demand.
A friend in the brokerage industry called me around midday Monday to update me on the scuttlebutt being talked about in markets. This after my Morning Commentary spent some time talking about how illogical the wheat rally was coming out of the weekend. My friend pointed out, first and foremost, the Biden Administration had reportedly given its okay for Ukraine to launch long-range missiles into Russia. Naturally, this ruffled Russia’s Putin’s feathers a bit, so much so that by Tuesday morning (US time) he was threatening retaliation against the US by changing his country’s nuclear doctrine, lowering the criteria required for a nuclear response. As it stands now, Ukraine firing long-range missiles into Mother Russia, after defending itself against an invasion for nearly three years (at least), fits the new criteria.
In the grand scheme of things, this week’s developments most likely won’t change anything. (I hedge my previous statement a bit because Mr. Putin is just – how can I put this delicately – whacko enough to actually use nuclear weapons). But I don’t think it will be necessary. Why? For centuries armies who have carried the war into Russia have failed, and this one mostly likely will as well. It’s generally assumed that come January Ukraine will be handed over to Russia on a silver platter, part of the next US administration lifting sanctions that have been in place since the invasion of Ukraine. As Bruce Hornsby would, “That’s just the way it is…”, and the latest developments only confirm the idea.
However, this explains some of the renewed buying interest in gold and short-covering in wheat. Starting with King Gold, the February issue (GCG25) rallied as much as $49.40 (1.9%) Monday before closing $44.60 (1.7%) higher for the day. The fact investors are buying again is no surprise, as those who understood the situation could see Chaos was going to continue to ramp up. Gold found renewed buying interest overnight through early Tuesday morning, rallying another $28.80 (1.1%) before closing $20.00 (1.0%) above Monday’s settlement. As I’ve talked about recently, it wasn’t going to take much for buyers to get interested in King Gold as a safe-haven market given the sharp selloff the past few weeks. According to recent CFTC Commitments of Traders reports (legacy, futures only), the noncommercial net-long futures position had been decreased from 315,390 contracts (week of Tuesday, September 24) to 236,450 contracts (as of Tuesday, November 12).
But what about Wheat? As previously mentioned, Monday’s Missiles Markets included the wheat sub-sector. This provided at least some explanation to markets’ rally coming out of the weekend, a moved I deemed as illogical. Does Ukraine potentially firing long-range missiles at Russia change the US supply and demand situation? Recall at the end of October, the US was figuratively swimming in wheat supplies. This is based on my analysis of National Cash Indexes (national average cash prices), using the age-old but seemingly long forgotten economic theory of market price equaling the intersection of supply and demand lines. The lower the market price, the larger supplies are in relation to demand. Naturally, the higher the market price, the smaller supplies are in relation to demand.
A look at the updated table of Index prices for Tuesday, November 19, shows the US wheat supply and demand situation has not tightened. Instead it has continued to grow more cumbersome since the end of October with the National SRW Wheat Index ($CSWI) down 15, the National HRW Wheat Index ($CRWI) down 9 cents, and the National HRS Wheat Index ($CRSI) is down 1 cent. Granted, this reflects a more abundant available stocks-to-use situation, with the Russian situation possibly affecting long-term supply and demand.
If we expand our view, did this week change global supply and demand for wheat? Of course not. At least not yet, but all bets are off if Putin decides to employ Russia’s nuclear arsenal. It reminds me of a story, of course. Back in early 2009, as I concluded my presentation at Commodity Classic in Grapevine, Texas, I was asked, in all seriousness, if the events of 2012 would change my long-term market outlook. I know I had a blank look on my face when DTN’s then Editor-in-Chief Urban Lehner reminded me that, according to some, 2012 would see the end of the world. I looked back at the attendee and replied, “Well, that would certainly change supply and demand”. The same could be said about Putin and his threats.
All that being said, the latest headlines did seem to trigger some short-covering buying by Watson to open the week. Recall last Friday’s CFTC Commitments of Traders report showed funds increased their net-short futures positions in all three wheat markets. While none of the positions were approaching record levels, they were still considered large. A look at daily close-only charts though Tuesday’s (November 19) close and things have gotten more interesting. March Chicago (SRW) (ZWH25) was down only 1.25 cents from last Tuesday’s close at $5.67 after closing 10.75 cents higher today. March Kansas City (HRW) (KEH25) was up 5.25 cents after settling 14.75 cents higher today. March Minneapolis (HRS) (MWH25) was up 4.75 cents. This indicates funds were covering some of their short futures positions due to the increased uncertainty on the world stage, not because global supply and demand was growing more bullish.
