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Funds, S&D drop wheat prices-Louise Gartner

05/13/2011 @ 4:32pm

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.

As we work through this growing season and see Northern Europe suffering with dryness, our own southern plains taking a big hit with drought and China seeing some yield declines as well from dryness, it becomes clear that the world will not be awash in wheat this year. Europe is lowering production estimates, already sitting 4 MMT lower than USDA projected this week; it is very possible that those estimates will continue to decline if soaking rains don’t come in the next week. It is also worth noting that old crop stocks of EU wheat will be tight, after a torrid export pace this marketing year. 

Black Sea production will be up but still about 15% lower than their peak of just two years ago. Projected exports out of Russia will be about half of where they were two years ago and Ukraine is just slightly lower than their pace of two years ago. While the Black Sea looks on track to be a player again in the export market, it doesn’t appear that they will be the major bearish factor this year that we’ve seen them be in years past. 

So, the question becomes, who will be the major exporter this year? Where will the bearish pressure come from? India, with their bloated stocks and talk of re-opening their export market? While they will likely export about 2 MMT to regional markets, that won’t be enough to break the market. China very likely will see a notable drop in production due to early season dryness in the major regions; they likely won’t increase their wheat imports significantly, but could well ramp up corn imports which by default is supportive to wheat. 

There is certainly a mix of fundamentals to consider when looking for a direction for the wheat complex. The price action has been choppy and swift, but we manage to hold major support and stall at major resistance. To me, it looks like this could continue for awhile yet. I don’t think there are enough bearish fundamentals to push wheat prices much lower, but the upside appears limited as well – for now. If corn resumes its upward trend, wheat would likely tag along. And there is still plenty of time left in the growing season for problems to develop. 

I would look for this recent trading range to remain intact, with prices currently holding support and looking poised to take a run at the highs of last week.

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This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named.  Information is obtained from sources believed to be reliable, but is in no way guaranteed.  Futures and options trading always involve risk of loss. Past performance is not indicative of future results.