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Crosscurrents for the wheat market
It was a rocky ride last week in the wheat complex, with prices under pressure early only to find strong buying late. There are many cross-currents happening in the wheat complex, and this growing season is already offering plenty of fundamentals for both the bull and the bear.
We can start with the weather – back in January. The cold snap that descended so quickly over continental Europe has done more damage than originally expected. More countries are reporting winter kill and production estimates continue to decline in Europe and the Black Sea region. So far, France has estimated at least 2 MMT of wheat lost, compared to the zero that they were projecting back in February. Now Germany is estimating 2 MMT lost. Italy has noted damage but not given a loss estimate. We already knew Ukraine was badly hurt, and this week Russia began reporting damage in the southern region.
It is worth noting that very few of those lost acres will be planted to spring wheat – corn would be the more likely replacement.
Here in the US, the winter wheat crop couldn’t ask for better weather – if it was late April instead of late March. Recent rains and warm weather are pushing southern and central Plains wheat plants far ahead of schedule, leaving them vulnerable to even average cold temps down the road. There were some areas in the far west that did get below freezing this week, but because of the early dry conditions the plants were not that far advanced and most crop watchers feel that damage was minimal, if any.
The flip side of that, of course, is if no cold weather does threaten the crop then the chances for excellent yields are high. It will be at least mid-April before the market can rest easy about not getting damaging cold weather.
The price drop last week spurred by a bunch of business, not only here in the US but also worldwide. Our own export sales just from a week ago (when prices were still rallying) were higher than expected. This week should see another strong number for exports. The Europeans also saw a significant increase in export licenses, with Australia getting a nice sale of 350 TMT of feed wheat to China. The lower price levels reached last week tested the lows of the last two months, and continues to be a level where demand steps up.
While the Black Sea region has not been a major exporter for a couple of months (high domestic prices and iced-up ports), it looks like Kazakhstan is trying to get into the game. They announced that they will be doubling their transportation subsidies for grain exports.
It appeared that US wheat futures markets actually were led by the European wheat markets last week, where the increasing evidence of winter kill damage along with dry conditions across much of the are creating a relatively bullish atmosphere there.
Technically, prices tested the lows established in February and January, and clearly held those levels with a solid reversal up that was strongly confirmed the next day. It appears that once again, those lows will hold, adding to the likelihood that they will become longer term support levels.
With world wheat production set to decline this year, and presumably world stocks as well, one would think that a longer term bear market is not in the cards. That said, to make a case for a longer term bull market, we’ll need an adverse weather event – which includes corn.
So as we kick off the growing season, there are plenty of fundamental issues already in the mix, and that will likely mean more volatility. It’s also important to remember the record short position of the large speculators. For all of their leaning on the wheat market, it hasn’t paid well for them, and just short covering on their part alone could send prices significantly higher.
So, I continue to think that at worst, we’ll stay in the sideway trading pattern. As we approach the upper end of that range we’ll likely stall, particularly if it happens before the plantings and stocks report next Friday. Owning calls going into the report would be the safest way to stay in a long position. And generally speaking, buying breaks looks like the strategy going forward.
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