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Wheat faces seasonal weakness

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.

Ukraine is already concerned about domestic supplies, and it’s easy to see why. They were already slicing production estimates of winter grains before the cold snap. The trade is now estimating that they could lose up to 50% of their winter grain plantings. Ukraine has banned its rail cars from leaving the country, effectively shutting down all exports by rail. They are also considering removing the value added tax on seed corn imports, as most of those lost acres will get replanted to corn. 

Meanwhile, the US is enjoying a surge in business. We’re suddenly much more competitive now that Russia has taken a back seat, the euro and Australian dollar have rallied and the US dollar has softened. Export sales have jumped since the first of the year, and we’re seeing some spillover support from higher corn prices as well.

That said, the 70-cent rally over the last two weeks could curb that competitiveness. In addition, there is a strong seasonal tendency for wheat to move lower through February, often peaking in the first week of the month and heading south into late February. 

And here we are, the first week of February, with the market rallying right up into major resistance. Record world carry-over stocks will most likely keep a lid on prices for the near term. It looks like a good selling opportunity, particularly for old crop cash sales. New crop sales could be prudent as well, but the increasing likelihood of a drop in production from winterkill could set the stage for stronger prices down the road.

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This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named.  Information is obtained from sources believed to be reliable, but is in no way guaranteed.  Futures and options trading always involve risk of loss. Past performance is not indicative of future results.

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