Wheat slide finds support
The wheat complex, which had been under heavy pressure since USDA's crop report last week, finally found some stability late this week, but not before significant supports were taken out as the market plummeted about 75 cents over six sessions.
While the winter wheat plantings reports could be construed as very bullish, the increasing carry-in stocks for wheat along with higher corn production were too much for the grain complex and long positions were being thrown overboard. Informa released their winter wheat plantings estimate on Friday with a 37.1 million acre projection, right in line with USDA's and having little impact on price action.
This puts wheat in a very interesting situation. The old crop fundamentals continue to get more bearish as exports struggle and stocks increase, but the new crop fundamentals are anything but bearish. With winter wheat plantings the lowest since 1913, there is very little room for weather problems. A short wheat crop will eat into those stocks very quickly. If the spring wheat market wants to protect its acreage base and rebuild quality stocks, it's going to have to offer better incentives than current prices. Keep in mind, too, that much of the soft red acreage entered dormancy in poor condition, and those acres risk being abandoned as well.
The dramatic drop in prices over the last week has certainly stoked business, with world export activity picking up significantly. We saw Saudi Arabia complete their tender as they bought 440 TMT from the Black Sea and Europe; Egypt bought 1 MMT from Kazakhstan with delivery spread out over the next year; Bangladesh and Iraq also issued tenders. After some quality issues a couple of weeks ago, Australia has confirmed some sales into the Asian markets as well.
Even the US had a stellar export sales week last week, racking up 875 TMT. This was the best sales week so far this marketing year despite the strengthening US dollar. After USDA lowered projected exports by a hefty 50 million bushels last week, the pace of exports to reach projections now sits at 78%, compared to the 5-year average of 84%. That's a much better rate than before the report but obviously comes at the expense of lower export projections.
The news this week of possible restrictions on banks' trading activities caused negative reactions across the equities and commodities. Whether one agrees or disagrees with the plan, if it ever comes to pass it will take time. And while it will ultimately reduce the trading activity of the markets, will likely not cause massive liquidation all at one. It would, however, reduce trading volumes in the markets. The exchanges might not like that, but at least the markets would have more stability since much of the volume now comes in waves either on the open or the close instead of being disbursed throughout the trading session.
Technically, wheat broke the key support of the Dec low with a great deal of momentum. The late-week sideways trade looks like it may be building a small base of support which could help wheat bounce. But there will likely be plenty of selling on even small rallies, considering the swiftness of the sell-off. I look for the Dec low to be enough resistance to stall a near term rally and turn the market back down. I would expect that last Wednesday's low will be re-tested and could well get taken out but that the October low will hold.