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Wheat tanks on bearish report

01/10/2014 @ 3:21pm

It’s becoming a familiar story: The trade expects positive numbers from USDA and gets bearish ones instead. And in a bit of a twist, they expected a negative slant to the plantings report and actually got a bullish number. But it wasn’t enough to offset the selling that gripped the market after an initial rally following the report. 

For a summary of the reports, click here: www.spectrumcommodities.com.

The long bearish trend for wheat got downright ugly on Friday. The day started out higher with bull spreads firmly intact, but following the report prices immediately shot higher only to stall out and then turn lower with a vengeance. Obviously, the bears aren’t anywhere near ready to call it quits, even with prices near major supports and supposed index fund rebalancing.

Corn, on the other hand, had the opposite price move. The trade expected an increase in yields, production, and end stocks and got none of it. Instead, USDA lowered all three and added a bullish quarterly stocks number to boot. Corn prices shot higher and didn’t look back, giving the charts a huge key reversal up. It’s probably safe to say that corn has found a bottom.

But back to wheat. This week started out with reactions to the cold weather with grain movement problems and potential for winter kill in the Plains (which is something the trade generally does not care about until it sees hard evidence). What did cause some problems was the disruption in transportation – from the farm level all the way to the exporter. The northern Plains had it worst, and the vacuum of spring wheat movement created a big bump in basis. That is unlikely to last once the weather warms up and railcars get moving again. 

This week, we also heard plenty of chatter about the increasingly difficult situation developing in the Argentina/Brazil storyline. There were reports early in the week of Argentina ships loading wheat headed for Brazil – which was negative for U.S. wheat prices. We also heard that Brazil was scrambling to find wheat wherever they could, buying a few cargoes from Uruguay. 

Then reports surfaced that Brazilian millers were requesting their government to allow 2.5 MMT of tariff-free wheat imports. It seemed that U.S. exporters presumed that request would be granted as they reportedly were loading wheat headed for Brazil. It’s getting to be crunch time for Brazilian wheat stocks and Argentina is likely not going to be able to deliver, especially with their own government doing all they can to restrict exports or tax them so high it becomes prohibitive.

Kansas City did have a few days of positive reaction to all of this, since hard red winter wheat is what the Brazilians will buy, and the U.S. is pretty much the only other supplier. But despite all the talk of more exports to Brazil, we’re not seeing it show up in recent export reports, as export sales last week were dismal. Granted, it was a holiday week. 

Despite shaky markets, bull spreads performed well during the week - until the crop reports. USDA lowered wheat feeding and raised exports, with wheat ending stocks up by 33 million bushels. However, winter wheat plantings came in much less than expected at 41.9 million acres, 1.6 million less than trade estimates. The bull spreads didn’t look so strong after that but managed to hold about steady.

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