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Wheat follows corn lower

Wheat was on the defensive much of the week, unable to find support from a bullish crop report or intensifying production problems in the Black Sea and China. Harvest pressure was part of the reason as combines moved into northern Kansas and Nebraska; weakening corn prices and hints of cooler temps in Russia also were credited for keeping prices subdued. 

First the positive developments. In Tuesday’s supply/demand report, USDA increased wheat’s exports for 2011/12 by 30 million bushels and lowered ending stocks by 40 million to 728 million. Carry that over to 2012/13 and we saw ending stocks down 41 million to 694 million bushels; not a shortage but certainly not burdensome, either. 

World wheat numbers took on a similar look with old crop ending stocks down 1.5 MMT and new crop down 2.4 MMT to 186 MMT, the lowest in 4 years. With worsening weather in China and the Black Sea regions, it is quite possible that world wheat stocks will continue to decline.

Then why couldn’t wheat stage a rally with those bullish numbers? It’s all about corn – which has ultimately led wheat prices for the last two years. USDA left corn statistics unchanged from last month’s estimates while the trade had expected to see a drop in production. Most traders feel that the average corn yield won’t be as high as the 166 bu/acre USDA is projecting, considering the stress already seen to the nation’s corn crop. Those changes will have to come another day.

Despite the negative crop report, corn managed to fend off the bears Wednesday and Thursday as weather forecasts called for more heat and dryness that was sure to continuing stressing the crops. The crop condition ratings took a dive for both corn and soybeans across the heart of the Midwest, but apparently it’s too early for the trade to become fixated on production problems. Projections of record corn production and suggestions by some that corn demand will falter with the sluggish economy cast a nervous pall on those wanting to trade the long side. In addition, weather forecasts changed late in the week and brought in more rains through the dry areas of the Midwest. The corn market rolled back down, taking wheat along with it.

The next major report is just two weeks away with the final plantings estimates and quarterly stocks report. Informa released their estimates on Friday, leaving spring wheat unchanged from their earlier estimate of 13.5 million acres, still much higher than USDA’s estimate of 12.0 million. They also increased corn plantings by 700,000 to 96.8 million acres, higher than USDA’s 95.9. Soybeans are projected by Informa to be 76 million, 200,000 higher than their previous estimate and much higher than USDA’s 73.9 million.

Harvest is quickly moving through Kansas and is well into Nebraska. Yields vary widely as do protein levels, both greatly depending on where the rains showed up during those hot and dry days while wheat was pollinating and filling. The market is looking for protein, as we can see by the sharply higher Minneapolis old crop futures. With the plentiful moisture across much of the northern plains, it’s very possible that protein supplies will remain tight. 

One of the more interesting pieces of news this week was China’s purchase of 110,000 of US soft red winter wheat, the largest purchase of srw in 8 years. Why buy wheat while you’re in the middle of harvest? And why not from Australia who supposedly has plenty available? We’ve watched the hot and dry weather settle in over the northern region of the North China Plain. We’ve timidly suggested that perhaps their wheat and corn crops were suffering. In years past, we’ve seen similar weather patterns and China would end up with record wheat production. This year apparently is different. Reports from within China suggest wheat imports could be as high as 5 MMT, double USDA’s projection. It would also be the largest wheat imports for China in 8 years and the second largest since the 1995/96 season - which contributed to the rally to record highs back then. 

As for Australia, well, their winter wheat plantings are down significantly this fall, with production projected to decline about 15%. Their prices are suddenly higher than the US; maybe they don’t want to see all of their supplies head to China. That’s fine with us.

The hot and dry conditions across much of the southern Black Sea region did not improve this week. Indeed, temps of over 100 degrees were common in southern Russia and forecasters were calling for the heat to move up into the northern region of Russia. Cooler temps are to replace the heat in the south, which kept a lid on world wheat prices. It’s hard to imagine there haven’t been notable yield losses in the Southern Russia region into the Lower and Middle Volga River regions. Here too, however, the trade is willing to wait to see if the forecast verifies and cooler temps come in to buy the wheat crop more time. But time is running short to stop the damage, much less reverse it. 

For now, wheat prices are obviously being kept in check and look poised to test the major lows from last month, especially if corn continues to stumble. However, the fundamentals for wheat seem to be turning more positive with production likely to continue lower and demand looking strong. Export sales this week were above expectation at 433,000 tons, not enough to offset the dismal corn sales of just 169,000. At some point, wheat will stand on its own, but obviously that time hasn’t arrived yet.

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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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