Wheat market peeks at upside potential
Wheat markets once again tried to sell off early in the week, but found no follow through to the downside; instead just trading sideways in a narrow range until Friday when prices finally caught an updraft on the heals of soybeans, continued weather problems in Argentina and rising world wheat prices.
Argentina announced that they were lowering wheat production estimates once again to only 8.3 MMT, their smallest crop in 20 years because of their worst drought in over 40 years. The drought has lingered well into the soybean and corn growing seasons, causing significant losses to those crops as well, which has provided a strong level of support for the US row crops. Argentina's decimated wheat crop will prevent them from completely supplying Brazil with their needs, and the US is expected to fill that gap. So far, the US has sold small quantities to Brazil over the past few weeks, reflecting the shift in sourcing by that major market.
World wheat prices have risen over the last couple of weeks, mainly as the Black Sea's export price has rallied. As a result, the US has become more competitive in the export arena again and we've participated in some key sales to Egypt along with the Black Sea and the Europeans. There is growing talk of tightening supplies of milling quality wheat, particularly out of the Black Sea region, which has undoubtedly contributed to the increasing wheat value. While that region may be running low on milling stocks, supplies out of Canada and the US should be able to satisfy world needs, and we may see the cash premiums strengthen into the spring.
Weather continues on the minds of wheat traders even though most regions are a long way off from breaking dormancy. The US Midwest and southern plains have received plenty of extreme cold on bare fields to warrant some winter-kill concerns which has likely already been priced into new crop futures contracts.
There is growing talk of China's dry conditions as well, with the Chinese government reporting up to 30% of their wheat growing areas receiving well below normal precip through December. While those dry conditions are worth noting, one can't get all bulled up just yet about a potential crop disaster in China. Keep in mind, much of their wheat is irrigated; not to mention that they're coming off of two bumper crops in a row, with the government buying all grains just to support domestic prices. It would take a serious production problem for China to run short of grain, and one just can't presume that will happen because it was too dry during the winter.
As for the Northern Hemisphere's growing season, India is first up and their crop will get going here shortly. They have reported a slight increase in plantings and huge improvements in seed quality and fertilizer application, along with better access to irrigation. It is generally accepted that about 90% of India's wheat area is irrigated, so the chances of another wreck like three years ago are slim.
Technically, wheat's price action is impressive to say the least. Two major opportunities to break this market down over the last two weeks have completely fizzled and the market has the look of wanting to test the top of the trading range again, and possibly the quick swing high from early January. Fundamentally, there is little reason for that high to be taken out. Seasonally, the market tends to be weak through February, so a late Jan/early Feb rally would likely be another selling opportunity before the seasonal time window sets in. The downside would initially be limited to the lows held during the last two weeks, with more major downside support at the trading range lows from October and November, and the extreme downside support being the quick swing low from early December.