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Louise Gartner: Wheat prices hold strong

After a slight pullback, wheat markets managed to reach a
new 13-month high this week, still riding the weather market fears of the
drought in Russia, and the expectations of heat-reduced yields in Europe. Funds
continue to be heavy buyers of wheat as they’ve gone from a net short to a net
long in just one week, not to mention erasing a huge net short position that
they had just a month ago.

 While the market watches the drought wreak havoc on spring
crops in Russia and Kazakhstan, they are also just getting the early results of
the European harvest which kicked into high gear this week.

Early French reports showed better than expected yields and
good quality. However, Germany is seeing a yield decline from the late hot
weather, and they are projecting that total wheat production will be down
10-20% from last year. Germany also had some rains that delayed harvest which
could hurt their quality as well. Spain is already 70% done with harvest and
their yields are improved over last year’s drought ravaged crop; they expect
total production to be up about 16%.

Further east in the Former Soviet Union states, Ukraine
projects that wheat production will be down about 2.5 MMT from last year at
18.5 MMT; that compares to USDA’s latest estimate of 20 MMT. Ukraine’s wheat
prices have risen about 20% in just the past week. Kazakhstan is projecting
about a 35% drop to about 14 MMT, equal to USDA’s latest estimate.

And then we get to Russia, which is certainly a mixed bag.
Basically, their wheat production has been left about unchanged because they
were well into their winter wheat harvest before the drought blew up on them.
It’s the spring grains that are being hurt, and the total grain production
estimates are all over the map. The Russian government projects total grain
production to be about 85 MMT, while the Russian Grain Union has it between
81-85 MMT, and SovEcon is much lower at 75 MMT or less. This compares to the
last two years of total grain production out of Russia of 108 MMT and 97 MMT. Russia
is already releasing government stocks into the domestic market to ward off
potential food inflation.

 One of the barometers we were using to measure the
aggressiveness of continued Russian wheat exports was to see how they would
respond to the key Egyptian market. They did respond to the latest tender by
once again capturing the complete sale of 120 TMT, but at prices a good $.77/bu
higher than just two weeks ago. There is little doubt that Russia will do all
they can to retain those hard-won markets even though grain production is lower
but it is very unlikely that they will risk lowering domestic stocks too much.

Clearly, world prices are rising as we see France sold 300
TMT to Algeria but also at prices much higher than they’re most recent sale;
sources put the price at $1.23 higher than their last sale to Algeria. The
rising tide is lifting all boats as US prices are following in lock step – at
least in the futures market. This weather driven market is having a typical
reaction in the cash market with basis getting crunched. Once the weather scare
is over, which could be soon since we’re already into the European harvest, the
basis should begin to recover. The Northern Plains harvest in the US could keep
basis in check for the next month or so, but eventually the basis should get
back to normal levels.

The annual spring wheat tour will be next week, and
expectations are for another huge crop as weather conditions have been nearly
ideal since planting. I would expect that wheat prices will pull back over the
next few weeks as we work through the remainder of the Northern Hemisphere’s
harvest. But I also expect that pullbacks will be supported and present good
buying opportunities, particularly for producers who want to replace cash
sales.

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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