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Wheat Bounces Along at the Bottom

Updated: 07/28/2014 @ 3:22pm

Wheat spent most of the week in a sideways, choppy trade. Normally, seasonal lows would be established by now, particularly for winter wheat. But given the overwhelming negative attitude across the grain complex, it is probable that wheat will continue to be pressured in the near-term.

Spring wheat is likely to head lower just on its own negative fundamentals, confirmed last week by the tour across the northern Plains. Spring wheat yields are estimated to be 48.6 bu/acre, the highest in 22 years and much better than last year’s impressive 44.9 and far above the five-year average of 38.1.

The prospect of another big spring wheat crop about to be harvested is weighing on the market as the trade is already struggling to move much of last year’s crop here in the U.S. and in Canada. Transportation issues are adding a serious burden to the problem.

Transportation is a major problem across the Midwest as well, with the shortage of railcars and engines sending costs sky-high and basis plummeting. And that’s just for old crop at a time when supplies are usually tightest. While the huge crops being projected are going to make for interesting storage and shipping problems just around the corner, this issue is expected to be with us for as long as crude oil and the products are tying up rail capacity.

Canada reported this week that its grain production estimates will be down from earlier estimates due to persistent rains and ongoing flooding. It would be hard to beat last year’s spring wheat crop anyway, but this year is expected to be down some 26% on lower acres and lower yields. Widespread abandonment is expected as well across the major producing provinces of Saskatchewan and Manitoba. Barley production is projected to be at a 32-year low, and the cool and wet weather are promoting disease and insect pressure in canola.

Speaking of losses, the European Union is experiencing a very wet harvest that has reduced a significant amount of wheat to feed grade in France and across southeast Europe. Both France and Romania are usually major suppliers to the key Egyptian market, but their quality problems are likely to push that business back to Russia and Ukraine.

The Black Sea region has had a generally good production season, but their geopolitical battle could be disruptive to their exports. The escalating tensions helped prop up wheat prices on Friday as some traders opted to cover ahead of the weekend. Both countries had good crops and neither can afford to lose out on export business. It would appear that Russia is in a better position to keep exports going if things get worse, and Ukraine’s financial woes could force the country to focus internally.

China tightened the squeeze on imports of DDGs from the U.S., demanding that all further shipments carry an MIR 162-free certificate. Of course, that is impossible, so they’ve effectively shut off all U.S. imports without violating trade rules. It’s no coincidence that they happen to have massive government stocks on hand and another record crop on the way.

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