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Dizzying volatility

09/24/2010 @ 3:49pm

The wheat market had something for everyone this week, but it’s unlikely that anyone really got anywhere after all was said and done. Sharply lower, sharply higher price action just continued the pull-your-hair out volatility that has defined this market for the last six weeks. The charts ended the week with an outside week lower, but good luck if you think selling it is a slam dunk.

The huge rally in corn is clearly not finished and weather woes for the Midwest harvest are only adding to the bullishness of both corn and soybeans. Heavy rains in the northern Midwest are delaying harvest and causing quality concerns, and prices have exploded higher in response. It’s hard for wheat to go lower when the row crops are surging. 

Corn yields have been consistently well below expectations since harvest started, which got the contra-seasonal rally in corn really moving. Soybeans are now in the same boat with the flooding in the northern Midwest threatening yields and quality. Both row crops already had a huge demand base and lower production makes the ending stocks picture too tight for comfort, particularly for corn. 

Now wheat is experiencing more weather problems as well. Killing frost in Canada; cool and wet conditions across the far northern plains of the US up into Canada; very hot and dry conditions in the US central plains; and continued drought in the key winter wheat regions of Russia, namely the Volga River region.

As you already know, milling quality wheat stocks have been in short supply for two seasons now. So the weather problems in Canada and the US northern plains are a big problem for the wheat millers, and only look to get worse as they struggle to get the crop in. On Friday, the trade was talking about Canada pulling their high quality wheat offers, which illustrates the difficulty the market will have finding adequate quality stocks, at least in the short term.

That said, we do know that both Argentina and Australia will be able to provide good quality wheat once they get their crops harvested, which will be into late October through Dec. So far, both countries are expected to cut good crops despite weather issues in Western Australia. 

Winter wheat plantings will quickly become the market’s focus, and the coast is not clear there, either. The US central and southern plains earlier in the summer had plenty of moisture, but persistent 90+ temps and lots of wind across the plains have deteriorated topsoil conditions, making for a slow start to planting. Rains did come late in the week for eastern Kansas and the Texas panhandle, but the western plains are still very dry. Further north, it’s just the opposite problem where too much rain has stalled the harvest and winter wheat planting.

We’re also closely watching moisture conditions in Russia, where the key growing regions of southern and central Russia look to have enough topsoil moisture to at least get wheat planted, but the important Volga River area still is very dry. SovEcon is projecting that Russian winter wheat plantings will be down about 20%, with most declines from the Volga Region. After steadily increasing wheat plantings in recent years, it looks like they’ll be back to 2006 levels with 15.0 million hectares, down 4 million from last year.

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