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Wheat market finds friends

Wheat actually had a sustained rally this week, responding to a strong corn market, a huge increase in export demand, and a surge in wheat feeding. The wheat/corn relationship was center stage this week as the discounted price got everyone’s attention. 

Wheat’s discount to corn evaporated this week, moving back above even money after a quick dip last week. While we’ve seen wheat feeding all winter long around the globe, lately it’s increased significantly here in the U.S. Several trains of soft red winter were reported arriving into Texas panhandle feedlots, helped along by a sharp drop in rail rates to capture the business. 

There are plenty of reports about wheat moving into the blend at ethanol plants as well. While that won’t be as big of a market as feeding, it’s still a market that didn’t exist just a few weeks ago.

That demand surge alone would be enough to shore up domestic prices. But exports have also been stoked with our lower prices, aided by India’s refusal to sell their stocks below $300 per ton. When India stayed firm with that level by rejecting several bids below it, it effectively established a floor under world wheat prices. With U.S. prices hovering below that level, buyers got aggressive with purchases.

The result was an export sales number of 1.1 MMT, the largest one-week sales figure in over two years. In addition, while India is successful in establishing a floor price, their lower quality wheat is spurring countries to look for higher quality to blend – and that’s where we come in. High-pro springs and winters will continue to be in strong demand this year, not only by Asian traders blending, but by nontraditional buyers like Brazil who could not source enough from regular suppliers and aren’t interested in blending.

Cash basis has been surging, and deliverable stocks declining as the sudden jump in demand has the cash trade nervously watching way more wheat being fed than expected. This market needs to protect quality supplies, and it will do it through the basis. In a typical year, winter wheat basis and cash tends to peak in early May, while spring wheat basis and cash tends to peak in early June. Look for those windows for selling opportunities.

Wheat and corn will continue to closely follow each other. I would expect the front month corn/wheat spread to move back and forth from even money for the next several weeks. Corn is finding support from increased export demand, a virtual halt to South American supplies as they concentrate on soybean exports and now nervousness over planting delays in the southeast. We also are beginning to hear chatter about potential delays to planting in the Midwest as heavy snowpack and cooler-than-normal temps suggest fieldwork could be slow to get started this spring. 

The improving demand outlook is certainly enough to support wheat, but ultimately, weather will be the main driver. For now, it appears that most wheat breaking dormancy in the Plains have enough moisture to get started. However, we know that subsoil moisture is almost nil from the central Plains north, so rains need to be consistent, or the crop gets in trouble quickly.

We see some much needed rains moving across the Black Sea region, which should help their wheat get started as well. They, too, had a dry fall and poor planting conditions as drought lingers in the Southern Region. Following a short harvest last year, Russia has had to release government stocks to keep bread prices in check. They’ve acknowledged that because of aggressive early exports, they will basically have zero stocks left by the time their harvest begins. They also announced that they will buy 6 MMT to restock their reserves, taking that directly from exportable supplies. Of all the major growing regions in the Northern Hemisphere to watch this spring, Russia is at the top of the list, with the U.S. a close second.

It’s encouraging to see wheat finally able to put together more than two days of an up move. As we move quickly into the growing season, I would expect more volatility as the weather messes with our heads. If the trend turns up, look for highs in that early-May time frame for winter wheat – unless we see trouble developing in the Black Sea. Then the highs would likely come in June/July. There are just too many potential problem areas to get too bearish this early in the growing season. Obviously, if the rains come when needed wheat will struggle to get further traction, but all those export sales do have to be delivered –- and sourcing those cash supplies could be interesting with wheat rapidly moving into the feed channel. 

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