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Bearish crop reports surprise trade

Wheat finished the year's first full week of trading managing to hold its gains at the trading range highs. Meanwhile, hedge and index funds made their way back into the market, following the long holiday break. Technically, it's an impressive move that has generated some buy signals for the trend traders with the breakout above the range's high. However, fundamentally, there are few reasons why prices can sustain these levels.

This morning's crop reports help to explain why the fundamentals are so negative. USDA released four major crop reports this morning, the prospective winter wheat plantings report, the final production numbers for the summer crops, the quarterly stocks report, and the monthly supply/demand report.

First, we'll look at winter wheat plantings, the only bullish report this morning. Not only was the acreage estimate lower as expected, but it was much lower than expected at 42.09 million acres. Hard red acres are estimated to be down 1.02 million acres, totaling 30.2 million, with 600,000 of them coming out of Kansas. Soft red acres are down 2.3 million at 8.29 million, spread across the Midwest region as the delayed corn harvest slowed wheat plantings. White wheat acres are projected to be 1.74 million, about the same as last year.

It was the quarterly stocks report, however, that caught the trade by surprise. Wheat stocks were 1.422 billion bushels, 58 million more than the average estimate and partially accounting for the 32 million bushel drop in feed and seed use that was reported in the supply/demand report. Corn stocks on hand were 10.08 billion, 256 million more than expected and reflected the 50 million drop in feed use, the 100 million decline in ethanol use, the 50 million drop in exports and the 81 million bushel increase in production. Soybeans also had a higher stocks use than expected at 2.276 billion bushels, 94 million more than average trade expectations. Despite raising exports by 50 million, USDA increase production by 38 million and lowered the crush by 30 million.

Final production figures for corn and beans were raised to 12.101 billion bushels and 2.959 billion respectively. Ending stocks for all three major grains were increased this month, with wheat now at 655 million bushels, up 32 million from last month; corn at 1.79 billion bushels, up 316 from last month; and soybeans at 225 million, up 20 million.

Clearly, the trade was not expecting such an increase in grain stocks and, considering the intense competition in the export markets for wheat and corn, these new statistics from USDA will likely create significant price pressure. I would expect that wheat will come back down to test the lower end of the trading range by the end of February, at which point the market will focus on the crop as it breaks dormancy.

Export sales last week were so poor they barely made the radar. At only 41 TMT, it was a shocker to even the bears. Granted, it was a holiday week, but the trade was looking for at least 300 TMT. Egypt's purchase this week of 56 TMT Black Sea wheat illustrated once again why our sales are so low; US prices were a full $0.38/bu below the next lowest offer. With the US dollar looking like it's on another upward hike, exports could get even more difficult.

Word has it that Australian farmers are developing some of the same marketing habits as US farmers. Now that they have a choice, if they don't like the price they just hold onto the wheat. With the abolition of the Australian Wheat Board, about 20 companies have been granted licenses to export grain out of Australia, and farmers now have a multitude of choices about where to sell their wheat -or not sell at all.

Reports suggest that they have been slow to move wheat as prices have fallen, taking the storage option instead. Maybe that will change on this rally? It is interesting to note that their slow sales pace hasn't pushed purchases to the US, where farmer sales had also been slow until this past week. It is also worth remembering that the slower farmer sales are now, no matter where that may be, the more wheat that will have to be moved as we get nearer to the next harvest. If, in fact, on-farm stocks are high (and staying high) in the US and Australia, two of the world's largest exporters, what does that suggest about the amount of wheat that will have to be moved in the summer?

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.

Wheat finished the year's first full week of trading managing to hold its gains at the trading range highs. Meanwhile, hedge and index funds made their way back into the market, following the long holiday break. Technically, it's an impressive move that has generated some buy signals for the trend traders with the breakout above the range's high. However, fundamentally, there are few reasons why prices can sustain these levels.

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