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Wheat demand is supportive

10/11/2013 @ 2:38pm

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? 

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