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Funds, S&D drop wheat prices-Louise Gartner

05/13/2011 @ 4:34pm

Wheat markets started the week with an impressive rally only to stall at the first resistance, and then get swept up in widespread selling from a bearish crop report and major fund liquidation across the commodity space. Rains moving into the central Plains also cast a negative sentiment in the wheat complex, even though for much of the wheat the rains will be too late. 

USDA issued their first estimates of the 2011/12 crops, with some fine tuning of the 2010/11 crops. Wheat had some minor adjustments for old crop within the different types of wheat, but the totals were left unchanged. For new crop, production was estimated at 2.043 billion bushels, 165 million lower than last year but still slightly higher than trade estimates. Winter wheat production was projected at the lowest in 5 years at 1.424 billion bushels.  It is highly likely that those production figures will continue to be lowered after searing heat settled into the southern Plains last weekend.

Export estimates for the upcoming marketing year were also lowered from last year by 225 million bushels due to lower production and increased competition from the Black Sea region. Despite the sharp drop in exports, however, ending stocks for 2011/12 are projected down 137 from last year at 702 million bushels; the stocks/use ratio sits at 30.7%. 

While few would suggest that a 702 million bushel carryout is tight, it clearly is not a burdensome number, either. In addition, when you break down the classes and quality stocks, we could easily be looking at another year of tight supplies of quality wheat – the third year in a row. The very slow planting pace of spring wheat here in the US and in Canada could create even tighter quality supplies. 

As the spring wheat growing season progresses, the market will be very attuned to crop conditions and harvest results. If we are actually facing another year of tight supplies of high protein wheat, who knows where protein premiums will go, but I think it’s safe to say probably much higher; and Minneapolis futures would continue to gain on Chicago for likely another year. For producers who have held on to high quality spring wheat hoping for a spring rally, it looks like the wait is paying off as values have held well and in some cases moved higher. The seasonal tendency is for spring wheat to peak into early June, which remains the target time window for this year’s hi-pro sales.  

For winter wheat, the seasonal tendency is for a top in early May, followed by a steady decline as harvest gears up and the lows are usually seen from mid/June through mid/July. This year, however, the harvest will obviously be much less than normal and harvest pressure is likely to be very light. Indeed, we could actually see the market rally during this harvest season. Normally there is a great deal of contracting already done by the time harvest rolls around, with commercials expecting to have plenty of wheat moving into the pipeline to fulfill those obligations. If the harvest turns out to be lighter than expected, commercials who are short often find themselves scrambling to find supplies for those obligations, pushing the market higher.

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