Market Strategy - Contrarian Thoughts: Risks Skewed To The Upside For Wheat? - JUNE 2017

Our core view is for wheat prices to remain on an uptrend as the market moves from a surplus into deficit in 2018. Although our commodities' team view is for a moderate strengthening of wheat prices - given the large supply overhang - our view is somewhat above consensus estimates, and we take this opportunity to discuss some of the upside risks that could see a sharper-than-expected gain in prices.

We forecast wheat prices to average USc475/bushel in 2017, which is above spot prices of USc440/bushel, and slightly above consensus estimates of USc438/bushel for the year. Our view is premised on the market moving into a deficit of 8.1mn tonnes in 2018, however given the strong surpluses in the years between 2014 and 2017, the wheat market has ample supplies, which should technically cap price gains.

That said, we see several potential upside triggers that could move the market and result in a much sharper appreciation that what we, or other market participants are forecasting. First, since 2002 whenever wheat prices have started to move higher, they have typically done so quite rapidly. Given where weekly momentum indicators currently are, there is potential for a stronger-than-expected move higher over the coming months.

The Bottom Is In, What's The Upside Risk?
Front-Month Wheat, USc/lb Weekly & MACD, RSI (Bottom)
Source: BMI, Bloomberg

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