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Louise Gartner: Cash market to take over wheat trade

Price action for the wheat complex remained volatile last week, as the market continued to digest the plethora of news and rumors emanating from the Russian drought. With so much uncertainty surrounding a major exporter, we can see why the markets have been so choppy.

We started the week under pressure from the prospect of the Russian drought dissipating and rains coming in. Temperatures in Russia have declined as summer winds down, and while the rains have been able to fall, so far they’ve only been light and certainly not enough to replenish the soils. Estimates are still all over the map, but most analysts agree that total Russian grain production will be less than 65 MMT, compared to normally around 90 plus. Wheat production is projected at around 43 MMT compared to 62 last year.

In the meantime, the export ban equated to roughly 1.5 MMT of wheat wiped off the books of importers, who suddenly had to scramble to secure supplies at much higher prices. Egypt, which just days before the ban had actually bought Russian wheat, reportedly had at least .5 MMT of contracts cancelled. They quickly replaced those lost sales with mostly French wheat, with one vessel of 60,000 MT coming from the US. Reports show that they are accelerating the loading out of France as well.

Later in the week, Russia announced that they will likely need to import some wheat, which sent the market higher again. While Ukraine and Kazakhstan both also have production declines, they did not impose export bans. However, it looks like much of what they will have available for export will go directly to Russia, effectively taking the Black Sea region out of the export market. It’s been several years since we haven’t had to compete with them, but make no mistake they’ll be back ASAP.

Southeast Asian countries were caught in a similar situation as Egypt. Being huge feed manufacturers, they buy a great deal of feed quality wheat from the Black Sea region and also had to scramble to replace those lost sales. They came in force to the US, creating much-needed demand for our abundant supplies of low-pro wheat. It couldn’t have come at a better time for US farmers, who’ve been hammered on low-pro basis until suddenly last week the market wanted all it could get. 

The huge shift in demand sent US export sales sharply higher at 1.4 MMT, the highest in 34 months. It also sent corn export sales soaring to 2.9 MMT, the largest in 16 years. Even despite corn harvest well under way, the huge increase in feed grain demand and the concern that corn yields won’t quite measure up to USDA’s estimate have pushed corn prices back to their recent swing highs and added another element of support to wheat.  

Stats Canada reported their wheat production expectations last week, with all-wheat estimated at 22.7 MMT, 1.7 higher than the CWB’s latest estimate and 2.2 higher than USDA’s latest estimate. It is only 4 MMT less than last year despite over 10 million acres of cropland not even getting planted. It looks like they might be a stronger player in the market this year than expected. 

Winter wheat plantings have now entered the discussion as the far northern areas of Russia would be seeding by now but topsoil moisture is still very low. Some suggest that Russian winter wheat plantings will be down by 30%, but there is plenty of time for the rains to come as late September will be the tail-end of their planting season. 

Here in the US, winter wheat plantings have begun in Texas and will work their way north through September. It is expected that plantings will be higher, not only as farmers respond to higher prices but also just getting back to normal plantings after a late corn harvest last year prevented about 6 million acres from being planted last year. In addition, the early corn harvest paves the way for increased double cropping in the south, first with winter wheat and then soybeans. One could expect that the entire Northern Hemisphere will quickly respond with more plantings as well, as moisture conditions are quite good across most growing regions.

Technically, wheat is caught between major support at 50% of the entire rally, and resistance at last week’s high, which is a .618 retracement of the sell-off from August 12. It would seem that if the market were going to re-test the major high, it would have done it by now. Therefore, I’m leaning that the futures price action is still in just a corrective phase of this major Russian rally, and prices will work their way lower over time. 

I also think that the cash market will take over leadership from here. While spot price may follow futures lower, the basis will improve as it regains its normal relationship to futures. So far, the market has followed the typical weather market action; the futures explode higher first and leave cash behind, then the basis catches up later. For those who fixed futures, it’s now a matter of time to let the basis recover to complete the cash sale.

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.

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