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Wheat Quality Story Builds

08/18/2014 @ 11:26am

As the news seems to be improving in the Black Sea Region Monday, most of last week's wheat prices seem to drift downward into new contract lows, on Friday headline of another Ukraine/Russia scuffle. 

It’s a story that just doesn’t go away, the geo-political strife in a major grain producing and exporting region. While the conflict has little to do with grain production, it is certainly affecting the world grain markets. At least enough to spook the bears, particularly when the grain markets have already been so weak. 

There is a bigger story developing in the wheat market, however. And that is the quality problems that seem to be creeping into every corner of the world. We are well aware of the quality issues that started in the US this spring, and now we’re seeing more problems show up in the PNW and North Dakota. Europe’s problems continue to increase with way too much rain on their ripe wheat crops as well, especially in France and Eastern Europe. 

Two weeks ago, Ukraine joined the list after abundant harvest rains, and then late last week reports surfaced that Russia was also seeing quality problems. And we haven’t even seen the Canadian wheat crop results yet. But we have seen the discounts get ugly, and those likely won’t get better any time soon. Premiums should perk up once harvest gets behind us; the spread between the poor and good wheat will likely get very wide through the winter, historically peaking in late spring.

It’s bad enough to deal with the quality problems, but the transportation issues are still looming. A big spring wheat crop from last year is mostly still on the farm, and a large new crop coming would create enormous transport issues even in a good year. This year will likely see a great deal of wheat piled on the ground, greatly increasing the risk of yet more wheat downgraded to feed.

Of course, the downside to so much low quality wheat is that it tends to get shoved into the feed channel as fast as possible, particularly in foreign countries where storage is saved for the good stuff. That puts pressure on the feed markets initially but it also tends to move the wheat out faster than normal as well. A bearish prospect at first, but the supply becomes more manageable as time moves on.

So, near term, wheat and corn will likely have difficulty holding rallies, despite the weekly key reversal corn had last week. It would be a win just to have wheat settle into a trading range. With the huge corn crop coming, it is very unlikely that corn can stage much support, either, unless weather turns really bad, really fast. In other words, wheat is unlikely to find support from the feed grain sector and will just continue to be a drag on said sector for the next few months. 

We’ll soon turn more of our attention to the Southern Hemisphere where both Argentina and Australia had good planting seasons, with more acreage for Argentina. Questions of El Nino effects for Australia and government intervention for Argentina will keep traders watchful throughout our fall and winter. And of course, the storyline of Ukraine/Russia will keep poking the market as well.

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