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Wheat follows corn higher-Louise Gartner
Wheat markets had a sharp move up this week, with Chicago leading the way as cash demand soared for feed wheat to replace very expensive corn. With wheat prices significantly lower than corn across the plains and Midwest, soft red wheat is being pulled into feeding channels from the western plains through the southeast.
Despite USDA’s stocks report showing a big jump in corn supplies, the market can’t seem to find them and it’s turning to wheat. But because of high storage rates, wheat is also hard to find – even during harvest. Basis for soft red wheat and corn surged as users scrambled for tight cash supplies and demand for July deliveries was strong.
This week, USDA released their monthly supply/demand report. The market wasn’t really looking for much as most of the adjustments were already revealed in the stocks and plantings report from June 30. However, we got yet another surprise for corn with a lower ending stocks figure than had been projected, which pushed corn prices higher. Wheat had some positive news as well with higher export projections, lower domestic ending stocks and lower world stocks with Canada taking a 3.5 MMT production cut.
And now weather problems have returned with a vengeance. The intense heat from the plains is moving into the Midwest just as corn is beginning to pollinate, and will be centered right over Iowa as it encompasses most of the broader Midwest. Even with adequate moisture, temps in the high 90’s and into the 100’s will still take their toll on plants and disrupt pollination. The last thing the corn market needs is more yield reductions from the heart of corn country but that certainly could be what will happen.
The current forecasts suggest that the heat will not linger in the Midwest but move back to the plains into next week. We’ll see what happens as we all know that forecasts are constantly changing. That said, the corn market wasn’t taking chances as it headed into this weekend. The strong rally from earlier in the week held well into Friday’s close, despite wheat and soybeans finding some long liquidation. There is too much risk for corn right now to not have some weather premium built into prices.
Because of the particularly tight relationship wheat has with corn this year, it will takes its cue from corn price action. At the moment, wheat’s strongest fundamental is the domestic feed grain market. However, we can expect the export market to find some headwinds in the near term as Russia and Ukraine get back into their export groove. Russia has aggressively pursued old markets and is reclaiming its turf with big sales to Egypt and Jordan. They are on track for a very large crop, with projections getting even bigger this week.
Ukraine is also looking at great production, but untimely rains at harvest will render most of their wheat as feed quality. That shouldn’t hurt them too much with such strong demand for feed grains, but they will have to compete with Australia in the key Southeast Asian markets.
It’s been a highly volatile few weeks, with the June 30 reports pulling the rug under the grain complex, and now getting a very impressive snapback. Weather is the key for the next several weeks and the massive heat wave engulfing the plains and Midwest is not going to let the market break unless we see a notable change in the forecast. Wheat has plenty of support from corn and domestic demand, but will run into problems competing in the export market.
Technically, wheat rallied enough to get momentum indicators out of oversold territory, but it’s highly likely that prices will still take one more stab down to re-test those lows of just a couple of weeks ago. That said, the seasonality suggests that those lows should hold. Wheat will follow the lead of corn, so anything is possible.
In the longer run, I look for prices to go higher, and much higher for spring wheat as we get a better look at the planted/unplanted acres across the northern plains. Minneapolis bull spreads found some traction late this week and I look for the 2011/12 marketing year contracts to continue to gain against the new crop contracts of Sep/Dec 2012.
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