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Louise Gartner: Wheat breaks trading range high
After a weak start on Monday and Tuesday, wheat managed a strong rally and by Friday had barely closed above the trading range highs in Kansas City and Minneapolis, and took Chicago prices close to their trading range highs. The Fed’s announcement of another quantitative easing program pummeled the US dollar and sent investors grabbing every commodity they could get their hands on.
But even despite a sharp recovery in the dollar on Friday, wheat still staged a strong day on Friday but corn prices couldn’t even get to positive territory. The announcement by the Kansas City Board of Trade that they might increase storage rates certainly could have helped demand for wheat.
Weather remains a very strong supportive factor for wheat as dry conditions are spreading deeper into the central plains and southern Midwest. While plantings are ahead of schedule, emergence is spotty and plant establishment is questionable across large swaths of prime winter wheat country.
Even though wheat planted acres are expected to be higher this year and the insurance base is high, if corn and bean prices stay strong into spring, producers would have a strong incentive to tear up poor looking wheat fields and go with other crops. There is already a huge fight waging for acres as cotton explodes to new all-time highs, corn and beans continue to push higher all through their harvest and wheat looks poised for another leg up after breaching major trading range resistance.
Demand for wheat remains very strong for both high quality and as a feed grain. The corn rally has clearly stunted its demand as exports have fallen sharply and feed manufacturers across the globe are switching to wheat. The sharp reduction in feed wheat normally supplied by the Black Sea region has clearly been a boon to US wheat producers, who for the last two years have had plenty of bushels but have struggled to keep the protein at normal levels. So, it would seem logical that as long as corn prices stay strong, lower quality wheat prices will stay strong as well.
Therein lies another question that is getting more press now that the election is over – what will happen to the ethanol subsidies that are due to expire on Dec. 31? For the free market folks, the answer would clearly be to let them expire. But there are many in that camp that always seem to be able to support subsidies (and tariffs) when it comes to agriculture, setting aside their free market theories.
I think it’s safe to say that if the subsidies expire, corn prices will suffer and wheat prices would surely follow them lower. It would probably solve the acreage fight, too. So, we’ll see what happens as we near year’s end as it could have a big impact on the grain complex.
This week, SovEcon reported that Russia’s winter grain plantings would be 14.6 million hectares, down 3.0 million from last year (about 17%). While that’s better than many had expected, we also know that many of those hectares were planted into pretty dry conditions in the southern Russia/lower Volga River Valley region, typically a high yielding region. We’ve also seen poor emergence and establishment there, too.
When you consider the dry and poorly established winter wheat regions of the world’s two largest exporters, it’s little wonder to see why wheat prices aren’t quite ready to break down, even if they’ve struggled to regain the upward momentum. With the Southern Hemisphere’s harvest upon us, prices may still struggle to stage long lasting rallies (unless rains continue to delay harvest), but come Feb/March the wheat market will need to take a hard look at new-crop prospects, which at this point are looking disappointing in key countries.
For these reasons, I expect that wheat will hold the major supports until we get a better look at the crop in the spring. We could begin to push higher even from here but it will be a tough job with two major exports in the midst of harvest. All of this assumes that the economy holds together and the dollar doesn’t stage any major rallies, which in itself could be argued is a big assumption.
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