Hope for the best, plan for the worst

While the Chicago Board of Trade (CBoT) contract has been declining in Australian dollar terms.

There have been plenty of news stories in the past two months: Speculation that Russia wouldn't extend the export program ex-Ukraine and of huge floods in China, plus the bombing of a huge dam in Ukraine.

The reality is that they have only caused blips.

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The market is showing an incredible ability to be both boring and exciting at the same time.

So what is happening?

And what should we keep an eye on?

France is Europe's largest wheat producer and we closely watch how conditions there, as it is a good indicator of their total crop production.

The EU produced 140.5 million tonnes of wheat last year, of which 38.5mt was exported.

Many forget Europe is a major player, especially in trade with the North African countries.

So how are the conditions this year?

If we compare the most recent data (week 23), against the period from 2012, then it's good (chart 1).

Currently conditions are rated 88 per cent good/excellent.

This is only 1pc lower than in 2015 - a year in which the EU produced a bumper crop.

While France is going gangbusters, another important global producer, the United States, isn't so lucky with drought conditions affecting crop conditions.

Chart 2 shows the average June conditions since 2010 versus current June conditions.

Conditions are below-average across all the major grains, especially winter wheat.

At this stage, I'd be keeping a close eye on corn and its development.

If we see further downgrades, that can have a big impact.

Speculators also have an impact on the market.

They 'bet' on the future value of commodities and make their crust by attempting to guess the direction of the market.

If short, they are betting on the market falling further.

Short sellers have effectively sold something they don't own and will aim to buy it back at a lower price in the future.

If long, they are betting on the market rising.

They own the commodity and aim to profit from selling it at a higher price in the future.

Whilst many don't like the idea of speculation, they serve many useful functions and markets would be difficult without them.

So what are they doing just now?

They are holding the longest net short position since 2018 (chart 3).

It is important to note that if the market turns bullish - such as anything substantially impacting supply - then those who are short will have to close their positions by purchasing.

This pushes prices up as buyers hit the market.

So what's happening?

The market doesn't seem to be showing too much reaction to events and is balancing the bearish with the bullish.

The world is still in a dicey position, with the ongoing war in Ukraine, which doesn't seem likely to end any time soon, and also with stocks within the world's exporters forecast to be pretty low this year.

In recent years, farmers have been lucky to have good crops and decent prices come harvest.

This year it is more important to think about your selling strategy.

Keep it simple, but we can't expect a huge global jump without a major hiccup in the northern hemisphere.

If we get a local jump, it will be down to local issues.

A local issue, with the corresponding high basis might sound good on paper - but it generally means you have less to sell.

In a perfect world, we'd have high prices caused by overseas factors and high local production.

Hope for the best, but plan for the worst.