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Wheat continues its fall

09/19/2011 @ 1:25pm

Grain markets continued their downward trek this week, fueled by major fund liquidation and improving weather for wheat, corn and beans. Frost warnings were rampant this week across major swaths of the northern plains and Midwest; there were areas that did get season-ending cold and likely some crop damage, but it apparently wasn’t enough to concern the markets.

Indeed, not only did the market shrug off the production losses, they just continued to push lower. It was hard to imagine the market not finding any bullish momentum from the biggest frost scare since 1974, but the buying simply wasn’t enough to overcome the massive fund liquidation. 

Whether the fund selling was from the rogue trader from UBS who burned through $2 billion, or from the ensuing announcement that UBS would be ‘restructuring’ their investment banking operations doesn’t really matter. It appears that many hedge funds are moving towards the exits, with numerous reports circulating about major losses and the desire to sit out the volatile markets. 

If that wasn’t enough for the wheat market to absorb, we’re finally seeing much-needed soaking rains move across most of the southern and central Plains. These rains will be a huge help in relieving intense dryness and at least helping producers get the crop planted and germinated. They will still need follow-up rains to help with crop establishment before dormancy, but this is at least a start. 

FSA released the final preventive planting and failed acres this week. The data suggested further acreage reductions of 1.3 million acres for corn, 700,000 for soybeans and 500,000 for wheat, which would be some spring wheat but mostly durum. 

Argentina could also use some rain. Their weekly crop updates continue to show dryness in the west that is now starting to creep into the major production areas in the east. The Argentine government is starting to shave yields because of the ongoing dryness.

Australia, on the other hand, is doing very well for the most part. There are a few dry areas and most of their wheat producing areas have plenty of moisture as the crop heads into reproduction. There was some frost that occurred this week in the Southeast that could have hit yields, but it does not appear to be a major problem. Australia is reporting that they will have near record production this year, with estimates ranging from 24-26 MMT. They also project record exports of about 20 MMT, which is about 3 MMT higher than USDA’s projection release just this week.

But the major underlying reason why wheat is on the ropes is the huge competition in the export market. The Black Sea region is a full-scale exporter again this year – and will be present for the entire marketing year. Russia again was the only seller in a key Egyptian purchase this week of 420,000. Even with Russia’s prices about $12/ton lower than last week’s offers, they were still $5/ton below current European prices, and $17/ton below US prices. There is plenty of wheat in the world – enough to fill milling and feed needs. With the US, the Black Sea, the Europeans, Australia and now India to a small degree, all vying for export business you have a recipe for a bear market. 

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