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Louise Gartner: Choppy wheat trade

Wheat spent much of the week in very choppy price action, trying to regain its bullish enthusiasm of just a couple of weeks ago. While prices did manage to close higher for the week, it took a great deal of energy just to get that done. The row crops also managed a higher trade, but corn stalled at the old highs. There is still plenty of unrest in the world that could be argued is supportive for commodities, especially food markets, but investor liquidation appeared to be active this week and if it continues we’ll likely see more pressure in the grains.

Export sales were disappointing last week as the trade expected another number around 1 MMT for wheat, but only got 651,000 MT. Corn and soybeans managed very good sales with both over their range of estimates; corn’s sales were 1.2 MMT and soybeans were 645,000. Ports strikes in Argentina and rains delaying bean harvest in Brazil are keeping export demand active for those row crops. 

In an almost not-surprising turn of events, China announced this week that they expect another bumper crop of wheat. Thanks to emergency measures by the government such as irrigation and cloud seeding that produced rain and snow, they now feel confident that the wheat crop will be just fine. It wasn’t even a month ago that they were bemoaning the dry February and the harm it could do to the wheat crop. 

It also was just a few weeks ago that some were predicting that China would have to import large amounts of wheat this year because of their drought and how that would even make the food shortage worse. So, with just one rain and some irrigation the China drought appears to be over. It’s a long way to harvest, but with 80% of the crop under irrigation, it’s not hard to see how they can expect another bumper crop. In that same report, China also claimed to have abundant stocks of grain (rice, wheat and corn). They did acknowledge that their corn stocks were tight.

While high quality wheat continues to hold its premiums, the low quality feed wheat is seeing more headwinds. With plenty of competition in that space, namely Canada and Australia, the main thing holding the feed wheat market together is the tight corn stocks. Feed wheat has displaced some corn feeding in the southeast US, as we’ve seen both Midwest soft red wheat and Canadian feed wheat moving into that region this week. We’ve also seen China and the Southeast Asian feed manufacturing companies buy Australian feed wheat. Recently, the EU has removed import restrictions on feed wheat with traders expecting that they would be buying Australian supplies. 

Corn appeared to be caught in some major cross currents as a result of the feed wheat displacement. With crude oil prices surging, normally corn would be pulled higher as well, which did happen early in the week. But with the news of wheat replacing corn here in the US, corn prices quickly retreated. The wheat/corn spread, which had traded as high as $2.20 just three weeks ago, is now around .95 basis front month futures; a huge move for that spread in such a short time and the main reason why wheat can now supplant corn in rations.

Russia announced this past week that they would likely extend the export ban on grains until Dec 31, 2011 instead of the current late August deadline. 

Technically, it would appear that the uptrend is over at least intermediate term, with the downtrend getting more firmly entrenched. Wheat has struggled to regain its upward momentum as it seems to have run into strong resistance at the 50% retracement of this recent sell-off. 

Seasonal patterns suggest an early March rally, which appears to be what we’re getting now. Then the seasonal tendency is for another leg down into early April. As we get into April, we normally see some weather premiums built into the market which can rally wheat into early May. As we work through the month of May, there is a strong tendency for the market to move lower as we get into the harvest season.

The continuing dryness in the plains is supporting wheat for now, but the market has been well aware of this problem since last fall. Even if the dryness persists and we see huge losses in that region, it will still be difficult to get wheat prices back to the highs of just a few weeks ago. We’d have to see production problems develop somewhere else in the Northern Hemisphere, but at this very early stage of the growing season, there aren’t any other significant trouble spots on the radar.

This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named.  Information is obtained from sources believed to be reliable, but is in no way guaranteed.  Futures and options trading always involve risk of loss. Past performance is not indicative of future results.

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