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Major spread unwinding

11/28/2011 @ 3:02pm

For s short trading week, there was certainly plenty of action. Major spread unwinding between Minneapolis and Chicago/Kansas City buckled the Minneapolis futures while the other two barely budged. After weeks of Minneapolis pushing persistently higher while the other two floundered into new lows, the abrupt shift in attitude caught the trade by surprise.

The entire commodity space is still tightly knit with the rest of the financial markets. So, the troubles in Europe, and now the slowing Chinese economy are adding to the woes of the world’s stock markets, and spelling trouble for the commodity markets as well. The good news is that Christmas shopping is off to a strong start here in the US, sending a much needed wave of optimism into our own stocks market. 

The wheat complex has a mix of fundamental news to digest as it wraps up this calendar year. The near-record large world crop and the return of the Black Sea exporting behemoth have evaporated bullish sentiment. Prices fell sharply once Russia began to ship wheat this summer and now we’re just trying to find a price level that will offer some support.

That could well depend on the corn market, as we’ll have another year of huge wheat feeding around the world, including here in the US. That said, Australia’s weather woes during their wheat harvest will be adding to the world’s supply of feed wheat. Those supplies will compete directly with US corn in the key Southeast Asian markets.

Australia is experiencing another harvest hampered by rains, particularly in the eastern regions where the higher quality wheat is grown. Quality is certainly being affected and the fear is that yields will now start to decline as well.

But, despite the pressure from large world crops and slowing exports for both wheat and corn limiting the upside price potential, the downside will likely be limited as well. Domestic demand for corn is huge and most of the corn went directly into storage after harvest, limiting availability. 

The market is also well aware of the planting problems for winter wheat here in the US and in Ukraine. The drought in the southern plains is still intact, and winter wheat had problems sprouting and getting established before heading into dormancy. 

We see similar problems in Ukraine, and their government is already projecting that about 30% of their winter grains did not sprout, and another 30% are in poor/very poor conditions. Thus, they are expecting to see a large increase in corn and oilseed plantings next spring.

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