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Wheat rally welcomed

After months of steady selling in the wheat complex, the rally this week was certainly a welcome change. The possibility that there could be notable winterkill in the central Plains finally caught the market’s attention.

Although it is far too early to know if there is any damage at all, the monthly crop condition ratings did stoke some chatter about a crop that could be in trouble. What started out as good planting conditions and an optimistic production outlook from the plains last fall has slowly transformed into a potentially much different scenario.

First, winter wheat plantings were lower than expected, although that could be revised in the March report. Then we had a series of cold snaps across the plains and Midwest that likely damaged unprotected wheat, which much of the plains and southern Midwest was during January. This latest cold snap did have enough snow cover to protect most areas.

Crop conditions dropped across many of the winter wheat producing states, fueling a short covering rally across much of the wheat complex. Kansas dropped 23 percentage points from last month in the good/excellent category. Nebraska was down 19%, Texas down 4%. 

The cold temps are also contributing to significant grain transportation problems, most notably in Canada but also here in the US. The delays in moving grains has pushed basis sharply higher across much of the northern plains, especially for oats and spring wheat. 

Minneapolis front month futures reflected the supply fear by moving much higher than the deferred months and the winter wheat markets. While the transportation delays could be bullish in the short term (very short term), the slow dispersal of a record large crop only portends increasing problems down the road. 

The Stats Canada report released this week showed huge grains stocks, not a surprise considering the massive crops this year. All wheat stocks were 28.4 MMT, up 38% from last year. But the kicker was that the vast majority was still on the farm, a record 25 MMT. At 52% of total stocks, that is a much higher percentage than normal. Most of those stocks will have to be moved before the next crop is harvested, and the longer that movement gets delays the more it gets bottle-necked into a dwindling time window.

History would suggest that we’ll see a large amount of old crop spring wheat selling, both in Canada and in the US, around the June/ July time frame – when producers feel comfortable about their new crop’s status. Low protein spring wheat will most likely remain under pressure through the marketing year, but particularly so in the summer if indeed we see a wave of selling in that time frame.

Wheat exports continue to outperform expectations, and Monday’s supply/demand report is expected to show a slight increase in the yearly projections and a subsequent drop in ending stocks. The adjustment for wheat is expected to be small, only about 5 million bushels. However, for corn and soybeans, the trade is looking for larger adjustments, which contributed to the stronger undertone to price action this week across the grain complex. 

Seasonally, wheat tends to rally into early Feb, and we actually are getting just that. But the middle of Feb tends to hold all kinds of bearish traps for wheat, and with the larger trend still being down it is likely that wheat will try testing recent lows before it focuses on the growing season.

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