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Active Spread Trade in Wheat Markets, Analyst Says

KC, Chicago Wheat front-month contracts only a nickel apart.

Wheat markets moved in choppy price action this week, with the main feature being spread action. Chicago surged higher against Kansas City, pushing into new highs.

Chicago wheat lost to corn just a few cents. So, of course, Kansas City really lost to corn, with front months now only about a nickel apart.

Lower quality hard red winter wheat from the southern Plains is seeing more movement into cattle feedyards, being a cheaper alternative to corn. USDA will likely increase wheat feed usage again, if not in Monday’s report, then in later reports.

Monday’s supply/demand report is expected to be a major market mover, with a huge – and very important – amount of data included. The much-anticipated planted and harvested acreage numbers for corn and soybeans will be most important.  

These numbers are expected to include the prevent plant and failed acreage, which has been a huge unknown so far this year. Of course, wheat numbers are always important, but they will take a back seat to the row crops this month.

With tightening corn stocks and plentiful feed wheat supplies (primarily hard red winter wheat), wheat price action has been closely tied to corn this year and will likely remain so for the marketing year. Kansas City futures have been unable to shake the pressure from Chicago wheat or corn, and it will likely be next year’s crop before it has a chance to recover those losses.

Export sales were a respectable 487 TMT, with spring wheat sales making up 225 TMT of them. We see that China bought a 60-TMT cargo of spring wheat; hopefully it won’t get cancelled as the trade war spirals out of control.

World wheat prices have stabilized over the last few weeks as the Northern Hemisphere winter wheat harvest winds down. We get a good look at the competition from the Egyptian purchases, and they’ve been active for several weeks. This week, Egypt purchased 415 TMT with all of it coming out of the Black Sea. 60 TMT went to Romania, 115 TMT to Ukraine, and 240 TMT to Russia.

This is the first time this marketing year that Russia has dominated an Egyptian tender. They’ve had a slow start to their export program with lower-than-expected yields and quality from their southern region. But the trade fully expects them to be as aggressive throughout the marketing year as they were last year, with production close to last year’s levels.

Spring wheat harvest will be in full swing soon, with high expectations for yield and quality. The market feels comfortable with world supply, for both quality and feed wheat, and sees the U.S. as not very competitive in the broader world market. That is expected to be dominated by the Black Sea and Europe. We don’t see major issues with the Southern Hemisphere production outlook, other than Australia hasn’t quite shaken the drought cycle.

Wheat will ultimately follow corn, and Monday’s report will set the tone for corn. So, we wait for the supply/demand report and then reassess wheat’s outlook.

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