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Louise Gartner: Rains pressure wheat

Wheat had very choppy price action this week, as weather and corn prices were the featured fundamentals this week. Goldman Sachs added pressure after they report that investors should liquidate long positions in commodities as they feel the markets could be reversing in the near term. We did see a fair amount of selling across the commodity space that appeared to be linked to their recommendation. 

It appears that the worst of the drought in the US southern plains has been factored into wheat prices, and this week’s rains brought the market well off its highs, even though the driest areas didn’t get any moisture. Good rains in Nebraska and northern Kansas and the eastern plains are keeping the drought region in check, even shrinking it slightly. That said, much of the wheat in the southwest plains is already dead, and rains won’t help anyway.

In the northern plains, the very wet and cool conditions are creating more planting delays in the US and in Canada. Those same moisture systems then move into the Midwest, causing more planting delays for the corn crop. New crop corn has been well supported because of the delays, but Minneapolis wheat struggled to hold its gains as the winter wheat markets pulled it lower.

The price action of corn has been very influential to the wheat complex for several months, and this week corn prices moved above wheat for the first time in 15 years, even as both market fell from recent highs. Corn basis has weakened as wheat moves aggressively into feed channels here in the US and worldwide. We see Australia making further inroads with the Asian feed markets with their lower priced feed wheat. The prospect of more US corn being supplanted by foreign feed wheat has pressured old crop corn, while the planting delays have supported new crop corn. 

While the weather here in the US is creating plenty of volatility, there are some weather issues across the Northern Hemisphere that are not going away yet. The dry conditions in the North China Plain appear to be worsening, which is a key corn and winter wheat region. In addition, the increasingly dry issues in the far northeast of China, which is also a key corn region along with spring wheat is presenting some concern as well. The lack of any Chinese commentary on these issues only reinforces the seriousness of the problems. Granted, it is still early in the growing season, but if rains don’t come soon, it will become a very big deal to the market.

We also continue to monitor the dry conditions in Western Europe, mainly France, Germany and now Spain. Here, too, it’s still early but they’ve been dry ever since breaking dormancy and the situation is becoming problematic with no forecasts for rain for the next couple of weeks.

It’s a much different story for the Ukraine and Russia, both of whom have had very good moisture over the last month. Even the dry region of Southern Russia received very nice rains earlier this week, which should at least get them off to a good start for spring planting. Winter wheat at this point should be in very good shape for both countries. 

It was interesting that Ukraine reported they may have record wheat stocks available for export after their harvest, due in part to the export bans from last year. They estimate that they may export double their average. Russia also is thought to have more grain stocks than earlier estimates as farmers begin to sell ‘hidden’ supplies, pressuring domestic prices below government offers. With the likelihood of a good winter wheat crop in Russia, traders have expressed concern about having old crop stocks on hand while the new crop is coming in. If that is indeed the case in Russia, where grain stocks are higher than earlier government estimates, it raises the possibility of Russia removing the export ban earlier than Dec 31. There is no doubt that once the export ban is removed they will be very aggressive with their exports as they try to regain lost market share.

Technically, wheat has dipped into the congestion zone of late March which appears to be giving decent support. The seasonal could still stay strong into early May but the recent highs will be tough resistance at this point, and might be all we get on a rally.

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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.

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