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Consistent pressure for wheat

Wheat continued its downward trajectory, closing either lower or barely unchanged every day this week. And almost every day this week the market saw positive numbers from the night session only to roll over from relentless selling during the day session.

While the lower prices over the last month have made us more competitive in the export market, sales are still slowing notably, adding to the negative price action. Egypt bought 240 TMT this week, none of it from the US. High transportation costs are still the problem for that important market. 

Export sales last week were also disappointing with only 288 TMT sold, below the low end of the range of estimates and sharply lower than what we’re used to seeing so far this year. We’re still ahead of the pace needed to meet USDA’s projections, but at this rate we’ll catch up quickly. 

As harvest in the Southern Hemisphere ramps up, we’re still trying to get the Northern Hemisphere wrapped up. Russia reported that they are about 94% complete, with wheat harvested so far at 53.9 MMT, far above USDA total estimate of 51.5 MMT. Ukraine also reported this week that they are about 95% done with harvest.

The slow harvest is the result of heavy fall rains, which has wreaked havoc on Russian spring wheat quality. It has also seriously delayed winter grain planting in both countries, with some estimates of about 30% unplanted for Russia. In addition, much of what was planted got in very late and will not be well established before dormancy.

As for replacing those lost winter grain acres, Russia will likely plant corn or sunflowers in the spring. Ukraine will usually replace lost winter wheat with spring wheat. 

Australia’s harvest is estimated around 25%, and production estimates are still all over the map – ranging from 22.0 – 28 MMT. Most estimates are around 24 – 25 MMT. Early season dryness and frost in northeast Australia created yields problems and now a recent frost in the southeast looks to have done a fair amount of damage as well. That appears to be where most of the confusion lies – what kind of yields will come out of the southeast. 

Quality is also a growing issue in Australia, but not only for the frosted areas. In Western Australia, where the majority of their wheat is grown, there are reports of low protein wheat being delivered. Estimates suggest that the majority of the wheat will be below 11.5 % protein.

This only further underscores the quality issue with the world wheat complex. While total supplies are adequate, quality supplies are in very short supply – and only getting shorter. In the bigger picture, this points to the Kansas City market as being the go-to market for high quality hard wheat. 

With Argentina’s crop down again, the US is the only supplier of that type of wheat. Brazil, the world’s biggest buyer of hard red winter, is also seeing a sharp drop in production. Of course, they’ve been buying US supplies for the last year and will surely continue to be a major buyer again this year. 

We’re not exactly busting at the seams of hard red supplies, with ending stocks projected to by only 194 million bushels, down 149 million from last year (a 43% drop). 

Low quality wheat will have to compete with a huge feed grain crop this year, and is largely credited for the steady pressure on the futures – along with the hedge funds turning net bearish. So the cash market is the place where we’ll see the premiums protect the high protein and punish the low protein. This is likely to be particularly evident as we get into the spring markets.

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