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Wheat sell-off continues

01/07/2013 @ 11:30am

Wheat markets started the New Year the same way they ended the old one, on the ropes from relentless selling. Meager rally attempts were quickly snuffed out by waves of selling that took prices into new six-month lows.


Apparently, fund selling isn’t over with news stories of pension funds joining in the liquidation. This is about much more than supply and demand in the wheat complex. With the increasing sentiment that the FED will be winding down bond purchases sooner rather than later, interest rates will likely rise and push the dollar higher, making exports more challenging.


With grain exports already struggling to gain traction, particularly for corn, it was just one more issue that the grain complex really didn’t want to address.


Speaking of exports, corn basically had another goose egg last week with only 49TMT sold. So far for the marketing year, corn export sales are only half of last year’s pace and well behind the pace needed to meet USDA’s projection. About the only international commerce taking place is consistent imports of corn to the East Coast from South American origins. It really is astonishing that the world’s largest corn exporter not only can’t muster up respectable sales but also is actually a large importer.


While total wheat sales so far are only about 3% behind last year, we’re still 13 points behind where we normally are to meet USDA’s projection. And that is after three reductions to those projections. The good news is that U.S. wheat is the cheapest in the world, and demand is expected to be robust once traders get back to a full work week.


Technically, wheat sold down into long-term supports stemming from previous triple top formations. It didn’t get much of a bounce from there, but at least it’s holding for now. Seasonally, wheat tends to carve out lows in mid-January and rally into early February before declining into late February/early March.


Fundamentals do not appear as bearish as the charts. Weather hasn’t improved in the Plains, and snow cover is minimal. Russia has had some extreme weather already with likely some winter kill resulting. But with the crop being dormant, the weather conditions aren’t going to be an overriding factor. Great Britain reported that winter wheat plantings are down about 25% due to a wet fall.


Index fund rebalancing and export sales are the key to near term price action. It looks like we could be in for a bit more pain from the rebalancing but exports should be a bright spot; we can compete against all other sellers, even India.


Argentine harvest is reportedly about 79% complete, compared to 93% last year. It’s a real disaster down there and doesn’t look like it’s improving much with corn plantings way behind schedule and likely down as well. They will not be selling any more than they’ve already committed (4.5 MMT), which is pushing Brazil into the world market. Talk has been around for weeks that they’ve been shopping Canadian and U.S. high-protein wheat.


Australia’s harvest has wrapped up. Production is down about 30% from last year, which isn’t much of a shocker; it’s the quality that surprised many. Low protein in Western Australia and New South Wales have buyers looking elsewhere for higher quality milling wheat, while Australia looks once again to be primarily a seller of feed wheat. Fortunately, there is plenty of demand for just that and they’re off to a good start with sales.

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