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Report erases wheat's momentum

Wheat prices managed to hold together early in the week, waiting for the supply/demand report. But a bearish slant to the report was all it took to erase the upward momentum and send prices lower. It appears that the ‘February Break’ is well upon us, and if that seasonal tendency continues it could keep pulling prices lower for the next couple of weeks. 

It was interesting to see wheat falter this week, even as the cold snap across Europe has crop watchers scrambling to assess winter kill damage. The assessments are getting bigger as the cold lingers on in many areas that had little or no snow cover. 

Ukraine is leading the way with estimates of severe damage in the south and east, mostly for rapeseed and barley, but wheat is also expected to see a significant setback. They’d already had a rough start with plantings down due to dryness, and now with the cold damage they are projecting that as much as 40% of the sown area is wiped out, roughly 8.5 million acres. 

Russia is projecting losses of around 8%, which is about normal for them. Bulgaria and the Czech Republic also are reporting widespread losses. Western Europe is certain to see losses as well, but estimates have been slow to develop from that region. 

Thursday brought the much-anticipated supply/demand report, with the trade bracing for the adjustments coming in South American production and exports. Most of the changes in the crop report were in line with trade expectations. 

US wheat exports were increased 25 million bushels, with ending stocks down a like amount to 845 million. Those ending stocks were slightly lower than trade estimates and would have had a bullish impression but USDA also raised world ending stocks another 3 MMT to 213 MMT, another all-time high. Most of the stocks increase came from India, not known for being either an exporter or producer of high quality wheat.  Nevertheless, the big increase was another reminder that neither the US nor the world is anywhere near a shortage of wheat. 

The same can’t be said for corn, where stocks are anything but comfortable. USDA did lower Argentine corn production by 4 MMT, and took their exports down by 3.5 MMT. In turn, they raised US corn exports by 50 million bushels (1.2 MMT), with ending stocks lowered by 45 million to 801 million bushels, the lowest in 16 years.

Exports sales for wheat continue to be very strong, with this week’s report showing 707,000 metric tons sold last week, the largest so far this marketing year and well above trade estimates. The bump in US wheat sales is a combination of a slowdown in sales and loading problems out of the Black Sea and Europe (weather) and a weaker dollar against the euro. After a slow start, the US export pace is quickly catching up with where USDA is projecting us to be, even after this month’s increase of 25 million bushels. We see demand shifting to other exporters as well, with Southeast Asian buyers moving from the Black Sea origins back to Australia.

It was reported this week that southeast US feed users were buying UK feed wheat, with at least four cargoes purchased so far. While not entirely unusual for this to happen, when you couple it with the bump in world ending stocks, bullish traders just couldn’t hold their ground, winterkill or not.

February is usually a tough month for grains, and it looks like this year will be no exception. If prices are going to follow the normal seasonal pattern, we’ll likely continue lower into late Feb. 

That said, this weather event in Europe and the Black Sea region could turn out to be a major issue once we get into the production season, which is just one month away. It’s also worth repeating that drought conditions are still deeply entrenched across the majority of the southern plains, and according to the US drought Monitor, the entire state of North Dakota is abnormally dry, with Minnesota and northwest Iowa also in a drought status.

Old crop fundamentals for wheat are generally bearish, but new crop fundamentals are taking on a much different look. There is a good chance that wheat prices will retest the January or December lows if this current pullback continues. However, given the strong base of support at those levels and the strengthening outlook for new crop, a test of those lows should be a good longer term buying opportunity.

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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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