Wheat under pressure
Last week we talked about how wheat dropping on a bullish government report was a bearish sign, and this week wheat followed through with more heavy losses (2 limit losses in a row).
Wheat prices are down over $1.50 from their highs already, and the charts show a lower high and a possible head and shoulders top in wheat. Really there has been no significant change in fundamentals from before, but apparently prices have gone up enough where the market thinks it has solved the wheat shortage problem.
Argentina and Australia will be harvesting wheat over the next month, with Argentina having a decent crop, but Australia suffering from another crop disaster. Winter wheat in the US is just about all planted, with an expectation that another 3-4 million acres were likely planted this year in response to the higher prices. Double cropping of wheat with other crops (soybeans mostly) has been rumored to be up as well. There are even reports of southwest IA producers planting wheat with the intention of double cropping with soybeans, a practice that would essentially mean the soybeans are uninsurable in IA (not a double cropping soybean state). With Europe dropping their 10% setaside and an acreage response due to improved prices, wheat acreage should be up significantly worldwide.
On Friday, wheat prices were limit up on rumors Russia would raise export taxes from 10% to 30-50%, but this week that was not confirmed, meaning it likely was a political ploy before fall elections. Food inflation has been getting the attention of voters, so proposals like this are popular steps to stop food inflation in Russia. However, the Russians also like to generate currency by selling at these high prices for wheat. So a lot of grain has been moving from Russia into exportable locations before the 10% tax is imposed in November.
Ukraine is pursuing just the opposite strategy, taking off export taxes in the near term to allow more selling of wheat. High barge rates are making transportation costs soar, so the limited availability of barges is making the cost to importing countries up even more than the product price. This is also limiting demand finally in wheat, with sales and shipments finally starting to slow down. But if Russia slows exports, it appears that might free up barges to ship Ukraine wheat from the Black Sea.
New crop wheat prices so far haven't dropped much while old crop has dropped over $1.50. In fact, Tuesday most wheat harvest 2008 forward contracts were at their old highs. So the incentive to plant next year's wheat hasn't waned yet. Perhaps that's needed, as wheat ending stocks/use is the tightest ever for the world. We simply need to produce more wheat next year, as the past 8 years consumption has exceeded production 7 times.
Corn is following wheat prices a little, but soybeans have shown surprising strength as funds continue to buy soybeans while they are liquidating their wheat positions. Apparently traders believe soybean prices need to go high enough to entice the South American producer to plant more soybeans. Early estimates are that they will increase acreage 5-7%, but many believe a 10% increase is needed to provide the cushion needed for the world supplies to be adequate.