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Wheat stalls in quiet trade

Wheat markets seemed to run out of gas this week after an early rally stalled near the crop report high and then buckled under a wave of selling. Volume was notably light this week as the trade chopped around waiting for September options to expire. 

Despite another round of production cuts from Russia, wheat prices couldn’t maintain the earlyupward momentum. Weakness in corn as Pro-Farmer’s state by state tour estimates were generally larger than expected, along with increasing harvest across the south, added to the negative sentiment.

Russian production estimates continue to dwindle as the Siberian harvest shows much lower yields than expected. SovEcon estimated total Russian wheat production at only 39 MMT, lower than the drought ravaged crop of 2010 that paved the way for the now infamous export embargo. Wheat exports out of Russia will be down sharply this year; the trade is narrowing in on the November time frame when they expect Russia will essentially be out of wheat. 

Europe expects that they will be able to fill at least some of the void left by Russia as their harvest is finally progressing with much less interruption than in the beginning. Total EU soft wheat production is estimated at 125 MMT, down 3% from last year. Considering the widespread winterkill they experienced and the dry start to their growing season, to only be down 3% is a win. The trouble for them, however, is that they lost some of their milling quality wheat due to the rains that hampered their harvest. It looks as though they will have enough milling wheat for domestic use, but most of what will be available for export will be feed wheat. Fortunately for them, that’s just what the market needs. 

The International Grains Council released their latest world grain production estimates. Total world wheat production was lowered to 662 MMT, down 33 MMT from last year and right at USDA’s latest estimate. World wheat stocks are projected to be 180 MMT, a 4-year low and compares to USDA at 177 MMT. 

The IGC also lowered world corn production to 838 MMT, down 38 MMT from last year; USDA’s estimate is 849 MMT. They lowered US production to 275 MMT, down 39 MMT from last year; USDA is at 274 MMT. Even with consumption declining for the first time in 20 years, they projected world corn stocks at a 9-year low of 120 MMT, down 16 MMT from last year and down 3 from USDA’s 123 MMT.

Like USDA, the IGC expects that Brazil will out-produce the US this year in soybeans. They increased Brazil’s soybean production estimate by 1 MMT to 76 MMT while lowering US production 6 MMT to 73 MMT.

Here in the US, while there is still plenty of attention on corn and soybean production, some of the focus is shifting to winter wheat plantings. High insurance guarantees and now moisture coming to the plains and Midwest could well pave the way for huge plantings and a good start to the season. 

While tight feed grain supplies will continue to underpin wheat prices until the next corn harvest, by the time next fall rolls around it is very probable that the fundamental picture for wheat will look much different than today (presuming normal weather). With new crop prices hovering near their contract highs, it seems prudent to at least start to scale in some sales for next year’s production. 

Near term, it looks like wheat has moved into a correction phase where it could test the recent trading range lows. With corn and soybean harvest ramping up and basis weakening we could see more drag for those markets as well, which could also help pull wheat lower. Over the intermediate term, wheat should find support if it tests those recent swing lows; I expect corn will find buying on pullbacks as well. While the upside may be limited to the summer’s highs, there should be enough support to test those highs at least once through the fall/winter.

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