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Meager seasonal rally

Wheat markets managed a meager rally last week on stronger corn prices and another forecast of potential frost in the central Plains. Some short covering before an important supply/demand report also prompted some higher prices. However, in the bigger picture, the rally was hardly a blip on the radar and the report didn't offer any fodder for the bulls.

As expected, USDA projected a huge jump in world production and a smaller increase in world ending stocks. World all wheat production was forecast to be 656 MMT, 50 MMT higher than last year, an increase of 8%. World ending stocks were expected to be up 13%, or 14 MMT, at 124 MMT. US production is expected to be 65 MMT (2.4 billion bushels), up 9 MMT or 16%, with our ending stocks double last year at 13 MMT (483 mb).

We'll see much more export competition this coming marketing year, which starts June 1. Virtually every other major world wheat producing region has had very good weather so far this growing season. The European Union is on track to produce 140 MMT, up 21 MMT or 17% from last year. Their exports will increase 67% to 15 MMT. The Former Soviet Union, primarily the states of Russia, Ukraine and Kazakhstan (the Black Sea region) will increase their production 7 MMT to 99 MMT, and increase their exports by 3.5 MMT to 25 MMT. With the US slated to see a reduction in exports by 8 MMT to 26.5 MMT, it becomes a real possibility that the Black Sea region could, indeed, export more wheat this year than the US, something that was unthinkable in even the recent past.

Canada's exports also will increase by 2.5 MMT to 17 MMT from their 5 MMT increase in production of 25 MMT, and we see Australia aggressively planting wheat into much better moisture conditions than they've seen in two years. Their production will hit the pipeline in October/November. As for Argentina, their on again/off again farmer strike is already prompting wheat watchers to project an 8% decline in their plantings.

The major buyers will be less visible as well, with India reporting record production of 76.7 MMT; government procurement is at a torrid pace, leaving the likelihood of imports almost nil, particularly after they canceled their second tender for import price call options. India actually was the catalyst for this major bull market of the last two years, and of course Mother Nature then really fueled the fire.

Now that India is out of the picture, we look to other potential major buyers, which appear to be few. Pakistan has announced that they will need to import 2.5 MMT rather than the 1.0 MMT they had projected initially. Other than that, it looks like it will just be the regular importers, and competition for that business will be fierce. The US does have an advantage with our weak dollar, but the dollar's future direction is certainly up for debate. And of course, it typically doesn't matter what world price is when it comes to the Black Sea sellers, who have historically been more than willing to undercut all other sellers regardless of price. I don't see any reason why that would change this year.

The Kansas wheat tour went through its paces last week, resulting in an average yield estimate of 43.3 bu/acre, 2.3 higher than last year. Total production was forecast to be 379 million bushels, down 12 from last year due to 500,000 fewer acres. Most of Kansas looked quite good, as expected. But it was the better than expected reports from western Kansas that was a surprise. Certainly not a bumper crop coming from that region, but many fields looked better than expected considering the very dry spring they've had.

Weather has been improving for the western Plains, slowly shrinking the dry region and giving a boost for yield potential. Surprisingly, there were still frost forecasts for the central Plains; and indeed, there was another night of freezing conditions in Nebraska/Colorado and far northwest Kansas over the weekend, but again apparently not cold enough/long enough to do notable damage. The cool spring and slow crop progress have certainly helped to ward off damage from these several freezes over the last few weeks. What a difference a year makes when just a year ago a warm spring advanced the crop quickly only to have a frost do significant damage.

From here forward, I think it will be very difficult to rally wheat as harvest has already begun in southern Texas. A big hard red winter wheat crop is maturing and a monster soft red crop is on its way to busting some bins. Old crop soft red is already making its way into feed channels in the southeast, indicating no concern about supplies.

Seasonally, wheat prices tend to see a rally into early May and then head south as harvest progress north. While last week's upward price blip hardly looked like a seasonal rally, I think it underscores what's coming for wheat if weather continues on this track. And unless corn and/or soybeans get into serious trouble, wheat has little choice but to continue lower into the peak of harvest. This year that seasonal low could well be into July instead of the usual mid/late June, since the crop in Kansas is slower maturing this year.

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 markets managed a meager rally last week on stronger corn prices and another forecast of potential frost in the central Plains. Some short covering before an important supply/demand report also prompted some higher prices. However, in the bigger picture, the rally was hardly a blip on the radar and the report didn't offer any fodder for the bulls.

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