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Wheat demand is supportive

Wheat markets managed to hold near the recent highs despite a lack of government reports. Production problems in the Southern Hemisphere coupled with continued very strong world demand has enabled wheat to break free of corn’s negative influence and trade its own fundamentals that are increasingly bullish.

Argentina’s latest wheat production estimate is around 10.3 MMT, 1.5 higher than last year but still well below the last USDA estimate in September of 12.0, and far below their longer term average of around 15.0 MMT. 

As Argentina looks at another short crop coming on, they are dealing with severe shortages of domestic stocks. Wheat prices have soared in the last couple of weeks, currently sitting at almost double Chicago futures prices. Rumors were floating on Friday that the Argentine government was considering shutting off wheat exports at least until new crop arrives, which is still weeks away.

Not lost in the Argentine production issue is that Brazil normally buys almost all of its wheat imports from Argentina. And Brazil imports almost as much as Egypt in a normal year. Argentina’s short crop last year forced Brazil to come to the U.S., where we’ve seen them be the biggest buyer of hard red winter wheat almost consistently on a weekly basis. It looks like their presence will continue to be felt for likely the next 12 months. 

With the Argentine government’s policy of high taxation of wheat exports, farmers have steadily lowered their wheat plantings. But with high domestic prices now bearing down, that attitude might shift back to more plantings - but that can’t happen until next year.

Australia has begun its wheat harvest, and while yields appear to be good across most of the country, quality has been disappointing. Most of the deliveries so far have been around the 10.0% protein and less. While it is still very early in the harvest season, the low protein content underscores the worldwide shortage of high-quality wheat, and the growing abundance of poor- and feed-quality wheat.

On Wednesday, Egypt issued its first tender since early September, then decided to cancel it when offers were $25 per ton higher than their last purchase. It really shouldn’t have come as that much of a surprise to them considering that futures prices have risen 70 cents since then, pretty much equal to $25 per ton. They said they would reissue another tender soon. They may not like the price, but futures action this week didn’t give them much leverage as prices held strong into the close on Friday.

The government shutdown has brought commentators and opinions out of the woodwork. It has also created a huge opportunity for business to get done under the radar and out of public sight. With the shutdown, there is no daily or weekly export sale reporting system. Rumors abounded this week that China was buying U.S. corn and soybeans since they could do it without it being reported. And why wouldn’t they? It would make sense that they would be doing it with wheat as well, particularly since they still have about 5 MMT left to buy. Why not buy it when no one would see and it wouldn’t move the market? 

It wouldn’t surprise me if Russia did the same thing. A drop in this year’s quality wheat production and a guaranteed drop in next year’s total wheat production because of lower plantings, on top of the government trying to rebuild stocks, might make them think a little below-the-radar buying could be a smart thing for them as well.

Friday was supposed to be a very important supply/demand report day; obviously, it isn’t important to Congress. USDA would have given us the revised plantings numbers, something the trade has been anxiously awaiting for months. However, there were trade estimates that still were released throughout the week, with the average corn production estimate of 13.8 billion bushels, equal to USDA’s September report; ending stocks were increased 68 million to a whopping 1.923 billion. Soybean production was estimated at 3.156 billion bushels, 7 million higher than September’s report; ending stocks were raised 17 million to 167 million. Yields for both crops were higher and acres were lower, but there weren’t any big production changes with the row crops, as amazing as that is considering the rough production season.

What was interesting was the wheat ending stocks number that the trade is estimating. They took it down another 42 million to 519 million bushels. That likely comes with a lower production figure and higher export estimate, but it takes us very close to sub-500 million, hardly burdensome stocks. 

Technically, the market is holding strong at three-month highs. It hasn’t been a problem in the last several months for the sellers to break what few rallies the market has had, but this time does seem different. Fundamentals are strong, especially for high-quality wheat. I would expect pullbacks to be well supported and Kansas City to continue to be the leader.

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