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Wheat testing key support
Wheat markets were on a slippery slope again this week, continuing their sell-off from the spike highs of early June. We’ve quickly retraced back to the major breakout level that had held the market for two months; so far, it’s holding that support but it looks like it’ll have to do it by itself as the other grains have decidedly turned south.
The rising dollar, weakness in corn and beans, weak export sales and combines approaching Kansas would all suggest that wheat doesn't have much hope for a near term rally- and it might not. However, technicals can be very influential and this is a key support zone. In addition, keep in mind that wheat has been the short leg of most corn and bean spreads and if funds decide to liquidate those spreads, we could see an updraft just on spread liquidation alone. That said, the longer term picture still points lower, I'm just being cautious and respectful of a significant technical support level and what looks like a major correction coming in corn and beans.
USDA released new supply/demand stats with only minor adjustments to wheat numbers. The surprise came in new crop ending stocks, which were raised 10 million bushels to 647 million, while the trade was expecting a decline. World wheat production was lowered by 1.5 MMT while world ending stocks increased .8 to 182.7 MMT, showing once more the drop in demand that continues to keep world supplies very high. They did lower US corn production and took ending stocks down to a very tight 1.09 billion bushels. There is clearly no wiggle room for corn, and a production problem there could translate into demand for wheat. At this point, obviously, that is not a concern to either market.
Canada's growing season has gotten off to a very rough start - too wet in the southeast prairies, and much too dry in the western prairies. Already, production is expected to be down significantly. Stats Canada also released crop estimates, taking all western wheat down to 20.8 MMT, compared to 25.5 MMT last year and about a 23 MMT average. Canola was also lowered to 10.2 MMT, compared to 12.6 last year and an average of 9.7 MMT.
Harvest progress in the US has gone almost unnoticed, but they are approaching the areas that had a decent growing season and thus we’ll likely begin to see more wheat hit the pipeline and basis come under pressure. There have been plenty of rain delays and growing concerns of yield and quality losses, but so far it hasn't been enough to stop the slide in prices.
China is quickly moving through their winter grain harvest, with wheat about 80% complete. There are reports that their wheat production could be much higher than earlier estimates, with one number out this week approaching 122 MMT, compared to USDA's just released estimate of 113.5 MMT. China had a bumper crop last year and their government silos are already full, so it will be interesting so see if they try to export more than just their usual nominal amount. They are also reporting that rapeseed production will be a record 13 MMT, now that harvest is 100% complete. The world’s two largest consumers of wheat, India and China, both have now had two bumper crops in a row with storage facilities overflowing.
Russia hosted the first World Grain Forum recently, and announced that they intend to increase grain production to the point where they can take their current export totals from 20 MMT to 40 MMT, which would be 20% of the world's market share, in just 10 years. One wouldn’t dare call their bluff on that one, considering the progress they’ve made in the last 10 years. Speaking of Russia, their rift with Egypt over the quality of wheat exports apparently is being resolved. Egypt has decided that they can, indeed, use the wheat in port after they fumigate it for bugs and sieving.
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Wheat markets were on a slippery slope again this week, continuing their sell-off from the spike highs of early June. We’ve quickly retraced back to the major breakout level that had held the market for two months; so far, it’s holding that support but it looks like it’ll have to do it by itself as the other grains have decidedly turned south. .