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Wheat faces seasonal weakness

02/06/2012 @ 7:08am

After a slow start, wheat prices continued pushing higher last week, with Chicago and Kansas City finally taking out their January highs. Chicago March managed to move up to the broader trading range high established last fall. Kansas City didn’t have enough buying power to push up to the fall’s highs. Minneapolis didn’t have enough buying power to even get above the January high. 

It was evident that the record short position by the large speculator group was feeling the pain last week, as short covering was much of the reason why Chicago out-performed the other two markets. By the end of the week, however, wheat seemed to have lost much of its upward momentum, with bear spreads working and sellers once again trying to lean on the market. 

The fundamentals had a much more bullish nature to them last week. The weather was the main issue, with bitter cold temps descending upon the Black Sea region, where thin snow cover in Ukraine and southern Russia was not enough to prevent damage. Now the market is projecting about a 10-15% winterkill for those two countries. 

The worst was yet to come, however, as those cold temps moved into Western Europe where snow cover was thin to non-existent and some wheat had even begun to green up, most notably in France. The odds of winterkill went sharply higher in Western Europe’s largest producing country. The trade was estimating losses for Europe in the 10-15% range for wheat and 15-20% for rapeseed. 

These are significant numbers for two of the world’s largest wheat producing regions. While it will be a couple of months before we can really begin to assess the damage, it will difficult for the market to resume a longer term bearish mentality given the weather problems the Northern Hemisphere is already experiencing. 

Here in the US, the far southern plains have lost most of their fall moisture. The Drought Monitor actually shows the drought conditions expanding well into Kansas, with dry pockets becoming larger in Iowa and Minnesota. That said, the major winter storm slamming the central Plains will at least bring some needed moisture to those regions, albeit not without a lot of stress to people and animals. 

All week, the trade discussed the likelihood that Russian export restrictions would be forthcoming with an announcement expected on Friday. No announcement came; in fact the government said it saw no need for grain export restriction in April. The market took that with a wave of selling – but which quickly recovered. The reality is that Russia isn’t competitive anymore and exports have slowed considerably out of that country, which makes it easier to say they’re not worried. I highly doubt that this ends the discussion, however. There is no doubt that the Russian government is keeping a close eye on export volumes and will step in if they feel domestic supplies are in danger.

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