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Louise Gartner: Quality concerns for wheat market to consider

11/01/2010 @ 2:20pm

Wheat markets surged higher last week, quickly running up to the trading range highs in Minneapolis and Kansas City, while Chicago managed to get just above the halfway point of its trading range. With quality concerns mounting around the globe, we continue to see the high quality futures markets of KC and Minn gain on Chicago, with those spreads pushing to new highs. 

We’ve been monitoring the declining quality situation in Eastern Australia as persistent rains continue to hamper harvest. To date, they are estimating that the east is about two weeks behind on their harvest. While still anticipating record yields, the heavy rains are expected to be lowering quality in a region that is known for their high quality wheat.

In Western Australia, yield expectations are low after a season long drought never allowed the crop to even get a good start. Production out of the west is expected to be half of last year at around 4.0 MMT.

Similar to last year, Australia is expected to also run into logistics problems as their still relatively new private export industry works out the kinks of managing an export program, from storage to transportation to loading to delivery. 

Over in Argentina, we’re starting to see similar problems as they’re trying to get harvest going while rains have begun to be persistent as well. Fortunately, it doesn’t appear that quality is a concern yet. Both Argentina and Australia will soon be deep into their harvests, and will no doubt be aggressive moving wheat into the export pipeline. 

Here in the US, weather is still a primary driver of price action. The chronically dry areas of the western central plains missed out on much of the rain last week, creating serious concern for western producers as they head into the winter. In the Midwest, most areas received good moisture and wheat should get well established before dormancy sets in. 

While low crop condition ratings last week helped propel wheat prices higher, this week the ratings are expected to improve after last week’s rains. This week also promises to be one of pins and needles as we wait out the election and the FED’s new plan to ignite the economy.

Technically, the trading range highs have turned back the market several times and we’ll see if that happens again. The influence of the hedge funds continues to be huge, who are trading largely off of the movements of the US dollar. So as the dollar goes, so does most of the commodities in the opposite direction. 

If the FED continues its money printing, then we could expect a negative reaction in the dollar, and likely another surge in commodity prices as investors look to hedge against what they would expect to be a wave of inflation – even though the first money printing binge couldn’t do it. 

For now, I look for the trading range high to turn back prices for the short term. But we’ll just have to let events play out this week to get a better handle on financial markets and thus commodity markets and thus wheat markets. 

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