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Wheat sustains rally

For the first time in weeks wheat actually had a sustained rally this week, pushing to a three-month high as Argentina ran into more production problems and rumors of another round of Chinese buying spooked the bears.

So far, for this marketing year that started on June 1, China has bought 4 MMT of U.S. wheat with 2.7 MMT of that already delivered. USDA has estimated that total Chinese imports will be 9.5 MMT this year; the market expects that eventually Canada and Australia will get some of that business. 

Argentina continues to grab headlines with a frost event in their western and northern region that was certain to finish off what was left of an already drought-stressed crop. While only about 15% of their total production is estimated to be lost, it comes on top of reduced plantings and a short crop from last year. 

Brazil took note of the losses as they typically import most of their needs from Argentina. Brazil, too, has experienced freeze damage to their southern wheat crop, and it is widely expected that they will continue to be a major presence in the U.S. hard red winter wheat export market for another marketing year. 

Brazil likes the high-quality hard winter wheat, and the U.S. is about the only other place to find it. In recent years, Russia has been able to crack into that market, but this year it is unlikely considering their own quality problems arising with rain-soaked harvests of both winter and spring wheat.

Speaking of quality, it looks like the U.S. and Canadian spring wheat crops are going to average below the benchmark 14% protein that the market prefers. Buyers simply don’t want springs below 14%, and marketing this year’s spring wheat is already getting ugly. Reports of extremely low protein levels showing up in the northern Plains have merchandisers pulling the plug on cash prices with soaring discounts. One would think that the discounts would be the worst at harvest, and that likely will be the case. However, with the world awash in low-quality wheat, it’s hard to imagine this situation getting much better before the next harvest.

Winter wheat plantings are off to a good start this year after the Plains finally got much needed rains. While the drought is far from over, at least there is enough moisture to get the crop well established before dormancy.

Export sales were strong again last week with another 620 TMT sold. Year-to-date sales stand at 59% of USDA’s projections compared to the five-year average of 52%. Corn and soybeans are also well ahead of the normal pace; corn is 45% sold compared to a 36% average, and soybeans are a blistering 69% sold compared to usually just 46% this time of year.

Monday will see a couple of USDA reports released. The small grain summary will give us a closer look at wheat production. The trade is expecting the number to be 2.108 billion bushels, just 6 lower than USDA’s September supply/demand report of 2.114 billion bushels.

For the stocks report as of Sep 1, it will essentially be the ending stocks adjustment for corn and soybeans since their marketing years ended on August 31. The trade is expecting corn to be 681 million bushels, 20 higher than USDA’s September supply/demand report. Soybeans are estimated to be 124 million bushels, 1 lower than USDA’s estimate. Wheat stocks are projected to be 1.913 billion bushels, 192 million less than a year ago.

Once those reports are behind us, the trade will refocus on harvest activity. So far, corn yields continue to be higher than expected, and early soybean yields are about as expected. Most expect that harvest will get into the heart of the Midwest in about two weeks.

Technically, the wheat charts look like signs of life has begun. We will likely see the sellers step up again like they’ve done for the last few months and get a quick sell-off from these levels, but I think that we’ve finally confirmed a long-term low. Fundamentals suggest an upward trajectory for wheat, and my guess is that we’ll now see the market find more buying on the breaks rather than selling on the rallies.

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