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Wheat holding key supports

Agriculture.com Staff 09/22/2008 @ 1:21pm

With the historic events occurring in the financial markets last week, wheat was not on the minds of most traders, but still managed to have a respectable week. It had plenty of volatility in its own price action, but after a week's trade showed it could hold at a long term support despite persistent bearish fundamentals.

Once again, we lost a key sale to Egypt at the hands of Black Sea countries to the tune of 205,000 metric tons, all going to Russia and Ukraine. The Black Sea region appears to once again be leading world prices lower, as they aggressively compete for the milling quality markets. They are also keeping in step with rapidly declining feed wheat prices, with both the EU and Black Sea finding themselves in the unenviable position of having to offload way too much low quality wheat.

Europe continued to raise its soft wheat production estimate, this time with an increase of 3.7 MMT, taking the total to 137.6 MMT, up 23% from last year. Most of the increase came from the northern countries, most of whom had harvest troubles from too much rain. Therefore, most of the production increase will be more low quality wheat which will eventually have to find its way into the feed channel.

As mentioned above, the abundance of feed wheat in the world will become a common theme this year. Wheat markets have already responded to this fundamental development, at least initially during the harvest period, with a surge in cash premiums and discounts. Much will now depend on the Australian crop and its quality status. We're pretty much assured they will have a respectable production, so quantity should not be an issue. If they, too, run into quality issues, then I would expect premiums and discounts to have another surge.

Our own export sales reflect this theme as well. Despite the record world crop and plenty of competition in the export arena, the US continues to see impressive export sales – with most of those sales being quality hard wheat types. Half of last week's 632 TMT sales were hard red winter wheat. Earlier, we saw spring wheat make up the bulk of sales. This demand for quality wheat will continue to pull buyers to the US and should also continue to support the Kansas City and Minneapolis markets over the Chicago market. Again, I don't think the world will run out of milling wheat, but we do need a good crop out of Australia or those spreads will see another run.

Speaking of Australia, they've received much-needed rains in some of the eastern wheat regions, which significantly helped crops there. However, Western Australia has not received the forecasted rains, and their crops are now suffering after what had been a beginning with high expectations. Argentina has suffered through their entire season, with plantings down because of dry conditions and political issues. The rains have been sparse and production estimates are declining, with latest reports suggesting a 25% drop from last year's 16 MMT. Interestingly, they are now forecast to receive plentiful rains; we'll see how much good it will do the crop at this point. Both countries are in the heading stage with moisture availability critical, but it doesn't look like all regions will have adequate moisture supplies.

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