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Wheat gets key reversal higher

Agriculture.com Staff 09/15/2009 @ 12:30pm

Have we finally carved that long elusive seasonal low? There seems to be a good chance we've done just that. While Friday’s crop report was a yawner and we didn't get that nice bearish reaction to make a spike low, the market still did drift lower to establish a new contract low early in the day and by the end of the day had put in an outside day higher -- a classic key reversal.

USDA's supply/demand report was virtually unchanged for most U.S. wheat statistics. The trade had expected to see an increase in spring wheat production as well as a decrease in wheat exports because of the slow pace so far. However, both of those estimates were left unchanged likely due to the slow pace of spring wheat harvest and that we’re still early in the marketing year. The U.S. will have to ramp up exports quickly to avoid seeing downward adjustments in future reports.

World wheat production was increased by another 4.4 MMT, mostly coming from the EU and FSU, both major exporters. No doubt we'll be wrestling with both of them for export business all through this marketing year, very much like last year’s grueling competition.

With spring wheat harvest well over half done (slow, grinding harvest that it is this year), cash pressure should subside for the near term. There is a strong seasonal tendency to move higher during September and into early October. If we're going to get that kind of price action this year, it obviously needs to get going soon and Friday's key reversal could well be the springboard for that to happen.

As we get into later October, the Southern Hemisphere's harvest will add its own element of pressure, virtually all of which will come from Australia this year. Australia’s production estimates range from 21.6 MMT to 23.5 MMT, above their average of the last several years of about 19.5 MMT (which includes those two years of major drought). Their exports are back to normal this marketing year at about 14.0 MMT, and for 09/10 their exports are projected to be even higher at 15.5 MMT.

It is interesting to note the spread relationship between Kansas City Dec '10 and Chicago Dec '10, which has KC now discount to Chicago. It's unusual for KC to move discount to Chicago and when it does, typically doesn’t last long. This likely reflects the good planting conditions in the southern and central plains for hard red winter wheat; while soft red wheat will likely see delayed plantings (and possibly reduced) because of the slow corn and bean harvests. We saw a similar price spread a year ago for similar reasons, but that spread eventually moved to over 30 cents (KC over Chicago).

I see no reason why that wouldn't happen again this year. In particular this year, with quality being an issue (hard red) and more than enough feed grain to go around (soft red). It will be difficult to justify Chicago maintaining a higher value than Kansas City as we get into the new growing season and as quality supplies tighten.

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