Wheat rallies, but on little energy
The wheat complex worked its way mostly higher over the week, some of it technical, much of it still fundamental. You could also throw in some support from the bean and corn complex, as they had a strong week as well, along with a mixed crop report from USDA.
The focus of attention has shifted from hard red winter wheat harvest and its problems to the spring wheat crop in the northern plains, as it steels itself against another major heat wave. This one is expected to be longer than the last one and cover more area, and is coming at a critical time during flowering and reproduction.
This intense heat moving across the northern plains is already doing some damage, and crops will be monitored closely for yield losses. The market is acutely aware of the need for bushels and, just as important, quality bushels because there is plenty of low quality wheat around for blending. The focus of northern Plains' producers as they head into the final stages of spring wheat production and stare at $6, is to just get the crop home.
Production/supply problems aside, we also see the demand base stay as healthy as ever, with export sales a whopping 1.183 MMT last week, well above trade estimates. The pent up demand has no choice but to come forward even at these price levels.
USDA issued their June supply/demand report on Thursday, not presenting too many surprises but still giving the market enough to chew on for awhile. Hard red winter wheat production was estimated at 964 million bushels, 31 lower than trade expectations and 282 million higher than last year's drought ravaged crop. Soft red winter what projected to be 364 million, 12 higher than trade estimates and 26 lower than last year. Other spring wheat was pegged at 498, 7 less than the average estimate and 38 higher than last year.
World wheat stats showed an increase in last year's carryout of 2.2 MMT, and coupled with a similar increase for this year's carryout, the total ending stocks for 07/08 were raised 4.5 MMT to 116.55 MMT. This alleviates some of the pressure of tight world supplies, but not much. We still need to get the crops home for the Northern Hemisphere and get a good season from the Southern Hemisphere before this wheat market can truly breathe easier.
The market reacted to the report as one would expect, with Kansas City stronger than Chicago in active spreading. But the rally didn't seem to have much energy to it, and even though wheat closed higher for the day, the front months were weaker than the deferreds, giving a bear spread look to the charts, which is often the prelude to a decline.
But weather is the key for the next several weeks. The weather forecasts will continue to grab most traders' attention, as we work through the reproductive stages for wheat, corn and beans. However, the technicals are still alive and well. After the last few weeks of struggling to move higher for wheat and retest those key reversal highs and failing to do so, it looks like we could be in for another leg down. If we do get one, it could well be one that mirrors the key reversal correction (in price, that is; the move would likely take more than just a few days), and the next major support would be the gaps from early June. Having said that, however, I still think that wheat will remain in its bull trend, or at least a large trading range, until we get the spring crop in the bin.