Can the Euro Help Paris Milling Wheat Prices in 2016?

The euro to dollar conversion will be the most important influence over European wheat prices in 2016 it is argued by a leading commodity market analyst.

The woes besetting the commodity complex need no introduction with the sector remaining in poor health and 2016 is not looking any better for the world's three most important grain crops.

Analysts at Sweden’s Handelsbanken argue that following the price decreases in 2015 for soybeans, wheat and corn, there is little reason to turn bullish towards these three major crops this year. However, a weaker euro could provide much-needed relief for European farmers.

Indeed, European wheat prices have however found some support of late:

“Poorer plantings in Russia and a strong USD that hinders US exports have together created a fair premium for wheat in Paris,” says Martin Jansson, Strategist for Commodities at Handelsbanken.

But, looking ahead, the exchange rate could be arguably the most important driver for the year ahead.

Currency Rates the Most Important Factor for 2016

Paris Milling Wheat prices are trading towards the bottom of their 2015-2016 range, just north of 1.71.


Above: Paris Milling Wheat prices heading towards the bottom of their range.

Playing their part in pushing prices lower towards the second half of 2015 were weak global macroeconomics and a heavy focus on China-dominated commodities that later spilled over into agricultural products.

“In one respect, the global macroeconomic environment has had a major impact: given the incredibly strong USD, US exports are very sluggish, with ending stocks relative to consumption rising to 45%. As such, there is almost a half of a harvest in stock,” says Jansson pointing out how exchange rates are feeding into wheat dynamics.

Studies confirm these are the highest stock levels since 2010-11, and before that, we need to look back to 1987 to find similar levels.

Handelsbanken are forecasting an even weaker EUR/USD exchange rate over coming months and see it heading towards 1.00, a move that could prompt export interest as a weaker euro makes European wheat more attractive on the international stage.

However, upside will be capped as a decent supply of extra wheat from the US is to be expected as winter wheat in the ground in the US looks good.

“Combined with the further USD strengthening that is in our forecast, where the EUR/USD reaches 1.000 next year, the situation appears all the more alarming for US wheat stocks, which should exert pressure on the upcoming forward contracts and force the forward curve to an even-steeper contango,” says Jansson.

Anecdotally, Handelsbank say they have heard of farmers buying large sacks to
store their wheat because they do not want to sell existing stocks at current prices and their silos are full.

Favouring Paris Wheat, BUT Russian Exports a Risk

A weak EUR makes Europe the obvious prime export origin.

However, the same applies to the weak RUB and Russia, which has now taken over the US’s role as the world’s largest wheat exporter.

This creates greater risks, as harvests in Russia and the former Soviet union vary much more than in the US.

“If a strong USD prevails, we can expect greater volatility in MATIF (Paris milling) wheat, particularly next year, when the current winter crops in Russia should be in better condition,” says Jansson.

Stocks in Russia are also high, much higher than last year, and Russia will probably export more, putting further pressure on European prices.

Handelsbanken are forecasting Paris Milling Wheat prices to fall 9% from current prices in 2016.

Chicago wheat is seen around 13% lower from current levels, soy 5% lower and corn 7% lower than present spot prices.