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Rain, snow pressure wheat
Wheat markets resumed their downtrend this week after just a minor rally the week prior. Prices were pressured primarily from a huge moisture system over the central and southern plains that dropped up to 1 ½ inches of precip across most of hard red winter wheat country, and the timing could hardly be better.
After months (and months…) of dry conditions the rain/snow will be a tremendous boost to topsoil moisture shortly before wheat breaks dormancy, paving the way for a good start to the growing season. We all know that those regions will need much more timely rain, but forecasters seem optimistic that the dry cycle is breaking down and additional systems will be on the way.
Wheat did find some support from a very strong export sales number this week. At 756 TMT, the sales were much above trade estimates and the average needed to catch up to USDA’s projections. To date, the US has sold78% of the projections, where we normally are at about 91%. Still a long way to go to catch up, but business is clearly picking up and these kinds of numbers will close the gap quickly.
China also announced that in the last two weeks, they’ve bought 350 TMT US wheat, 400 TMT Australian and 100 Canadian wheat. Trade chatter suggests that they bought even more this week. Only about 140 TMT to China showed up in this week’s export sales report, so next week should hold big numbers as well.
Egypt was in the market this week, but only bought one cargo of US soft red winter. Prices reacted higher initially to the report, but couldn’t hold those gains as traders expressed disappointment that they didn’t buy more. Egypt has reported that they have adequate wheat stocks on hand for several months, suggesting that purchases could remain light for some time.
Other negative issues in the market were the reports of yet another major hedge fund liquidating commodity positions. We saw huge liquidation in metals and energies early in the week, and then grains appeared to get caught up in the selling later in the week, adding to the negative weather sentiment.
USDA also added their share of discouraging news to the market with their Outlook projections. They estimated 2013 wheat plantings at 56 million acres, up 300,000 from last year. Total wheat production is estimated to be 2.1 billion bushels, down 170 million from last year. Even with the minor change in production, the average price is estimated to be $7.00, down 11% from last year’s $7.90.
Corn plantings are forecast at 96.5 million acres, down 700,000 from last year. Total production is projected to be a record 14.5 billion bushels, up 35% from last year’s drought reduced 10.78 billion. Average corn price is estimated to be $4.80, down 33% from last year’s $7.20.
Soybean plantings are estimated to be 77.5 million acres, up 300,000 from last year. Total soybean production is projected to also be a record at 3.4 billion bushels, up 13% from last year’s 3.0 billion. Average soybean price is projected to be $10.50, down 27% from last year’s $14.30.
While these numbers certainly cast a bearish tone to price action, it is important to remember that USDA is assuming trendline yields, and with extremely tight carry-over stocks of corn and soybeans obviously any hiccup in production creates a much different scenario. Indeed, they also pointed out that world corn days-of-use stocks will sit at a 39-year low when the marketing year ends on August 31.
As for wheat, well we certainly seem to be following the normal February Break seasonal price action. That seasonal weakness normally ends by late February, so I would expect prices to find some stability in the next week or so. If moisture keeps falling in the plains, prices will likely just languish at these levels until we get a look at the crop once it greens up. Until then, exports and weather will continue to be the driving forces.
For producers interested in replacing cash sales with call options, this time window is normally when you would want get those bought – after the February Break but before the crop starts greening. The rains needs to come in a timely manner or the hard red wheat crop in the plains could quickly get into trouble, making those options a nice position to have. Particularly so in a year like this when grain stocks are extremely tight and other major wheat producers are also looking at lower wheat production because of poor plantings and harsh winters.
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