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Wheat market finds high gear
Wheat markets surged higher this week, led by corn and soybeans as those crops wither under intense heat and drought conditions across a huge portion of the US. Already, the weather and crop conditions are being compared to 1988, the last major drought in the Midwest; and for at least the next week it looks like there is little relief in sight.
Indeed, what relief is showing in the longer range forecasts suggest that the massive heat dome will shift out of the Midwest and into the northern Plains, the one region of the country which had so far avoided most weather problems. That could spell trouble for a spring wheat crop that was off to a stellar start this year.
There is no doubt that the corn crop is in serious trouble. Soybeans aren’t far behind if the hot and dry conditions persist – which they are forecast to do. It doesn’t take much number crunching to calculate corn and bean ending stocks approaching zero, which obviously the market can’t allow to happen. The price rationing process has started and doesn’t look like it’s going to end soon.
To throw a little more drama into the soybean complex, it was widely rumored this week that Brazil, the world’s second largest soybean exporter, has over-committed on soybean exports due to their own drought. The talk was that they were actually looking to the US for soybean imports that they could use to fill their own obligations. That could really add fuel to the fire.
Corn pollination is well under way in the south, where the extreme heat is clearly taking a toll. The rest of the Midwest will be pollinating over the next 2-3 weeks, of which at least the early days are still forecast for high 90’s and into the 100’s. It’s not unusual for thunderstorms to pop up in the high heat, and weather forecasts do call for some storms across the northern tier of the Midwest, but they are expected to produce only light and spotty rainfall.
Understandably, the market is focused on corn and soybeans during this weather event. But wheat is likely to be just as dynamic if those prices really explode higher, as the feed guys will have to come back for the corn substitute.
Wheat has a tendency to really run if it kicks into high gear, and large speculators are still net short. In addition, world wheat production estimates continue to decline with Russia, Ukraine and Europe all announcing lower expected output than their previous estimates. US stocks are also set to decline from last year, even with a larger crop. Throw in a little more feed usage and suddenly stocks get tight in a hurry.
USDA issued their final spring planting estimates and quarterly stocks report on Friday. Both corn and soybean plantings were higher than expected, but not enough to cast a bearish slant to the market. Corn plantings at 96.4 million were 300,000 higher than expected; and soybean plantings at 76.1 million were 600,000 more than expected. The caveat, however, is that much of the soybean increase will come from double-cropped acres behind the wheat harvest, which at this point is unlikely to happen considering that that region is the core of the drought area.
Wheat actually had a bullish acreage report with all-wheat 580,000 less than expected at 56.1 million. Spring wheat and durum plantings were left unchanged from the March estimates at 12.0 million acres for spring and 2.2 million for durum, both much less than pre-release estimates.
The stocks report was finally a neutral one, after the last several creating limit moves in corn. This time around the numbers were close to estimates with corn slightly lower and wheat and beans just slightly higher than estimated.
Now that the reports are behind us the market will re-focus on weather. The forecasts still call for intense heat for at least another week across the vast majority of the Midwest and plains, with little rain other than sporadic thunderstorms. This will only add to crop stress and traders will ratchet down yields aggressively if the forecasts verify.
It’s very difficult to project how far a market can go in a weather driven environment. But no doubt they will go much higher if the heat and dryness do linger. Grain stocks here in the US and abroad are simply too tight to absorb serious crop losses. Weather markets usually flame out in a blaze of glory, but I don’t see that happening for at least a couple of weeks – not unless the weather moderates and rains come, which is not in the forecast.
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