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A Bullish Crop Report Buoys Wheat

Wheat markets got a boost this week from a rare bullish supply/demand report. Even for those few that were thinking USDA might increase wheat export sales projections, they too were surprised by the large bump in those estimates.

A 50-million bushel jump in export projections caught the market by surprise, but it was also surprised by the 4.5 MMT decrease in world production and end stocks. With only three reports left in this marketing year and the continued strong pace of sales, the USDA cut to the chase and lifted sales estimates. Most of that increase came in the quality markets of hard red winter and hard red spring, as those two markets are leading the way in this year’s export figures.

Most of the world decline came from a 3.0 MMT drop in India’s production as dry conditions are threatening their crop. Kazakhstan also saw a 1.5 MMT decline in production. 

U.S. corn ethanol grind was increased by 25 million bushels. Soybeans were left unchanged, which was also a big surprise as the trade had expected lower ending stocks. Wheat stocks were lowered by 47 million to 1.139 billion, still a very big number. Corn stocks were decreased by 35 million to 2.32 billion, also a very large number.

Both wheat and corn markets had a very impressive run this week (even after a lower start), which extended the rally started a couple of months ago. Corn has managed to close above key resistance on steady buying this week. Wheat has rallied quickly up to major resistance, old trading range lows from last summer.

The irony is that February tends to be a weak month for the grain complex. However, this year we see the grains finding buying interest from large speculators on ideas that inflation will support prices. Wheat is also supported by improving world prices and the lack of quality supplies. It also is seeing a lack of selling pressure as dryness and much above normal temps threaten to bring wheat out of dormancy early across the central plains. Long term weather forecasts suggest that dry and warm will be the story into late February, and talk surfaced this week of El Niño possibly developing this summer. India’s woes are also supporting the broader world market, along with slow Russian farmer selling.

I think the strong rally this week, while not turning the market bullish, should confirm that longer term lows were established in December. The market will soon be shifting its focus from old crop demand, which clearly is expected to stay strong, to new crop possibilities. 

The lowest planted winter wheat acres in some 100 years and the likelihood of a dry start to the season has changed the general attitude of the market. That said, we’ll still need a major production shortfall somewhere, and quite likely two of them, to turn wheat back into a bull market.

For that reason, and because we’re at major resistance levels, I suggest taking advantage of this rally in wheat to get more sales on the books, both old and new crop. They can always be replaced in March with call options. I also still look for Kansas City to gain on Chicago, particularly as we head into spring when we should see Kansas City build a weather premium while Chicago becomes the go-to market for moving vast quantities of lower quality wheat. 

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