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Another Bearish Blow For Wheat Prices
Grain markets waited all week for important crop reports, particularly for wheat, trading sideways until their release on Friday.
The Small Grains Summary and Quarterly Stocks reports held important numbers – the stocks report for marketing-year end stocks on corn and soybeans along with first quarter usage for wheat; while the Small Grains Summary was the fine tuning of spring wheat production – and the much anticipated assessment of abandoned acres after a brutal drought this summer.
The trade expected lower wheat production but got just the opposite. The trade estimate for all wheat was 1.718 billion bushels, but USDA delivered a 1.741 billion bushel number – still down 569 million (25%) from last year. Spring wheat production was pegged by USDA at 416 million, 34 million above estimates – but still down 77 million from last year (16%) from last year. Durum was pegged at 55 million, up 5 from the estimate but still down 50 million (48%) from last year.
The higher production estimates spilled over to the stocks report that showed wheat stocks as of Sep 1 at 2.25 billion bushels, 50 million over estimates but still down 295 million (12%) from last year. Corn stocks of 2.29 billion were 56 million lower than expected but up 553 million over last year; and soybean stocks at 301 million were 38 million lower than expected but up 104 million from last year.
The bearish wheat numbers quickly pushed all wheat lower, led by heavy selling in Minneapolis. A feeble attempt to brush off the numbers shortly after the report didn’t last long and selling picked up again into the close with prices settling near the lows of the day.
It has been tough for wheat to sustain upside momentum. We get a nice little bump one day and it evaporates the next. Seasonally, we typically see a rally into early October, and then the Southern Hemisphere’s crop fills the world pipeline.
However, this year we don’t expect to see much pressure from the Southern Hemisphere as Australia’s crop is a disaster in the making (drought, freezes). Argentina will likely have a good crop despite some regions with too much rain potentially hurting quality, but most of their wheat will go to Brazil.
By far, the biggest bearish component to the wheat market this year is the massive Russian crop and their huge export program. They tend to set world price anyway, and this year will obviously be no different. But what is different and unusual, is their export prices have slowly worked higher over the last several weeks, pulling world values higher as well. US gulf basis has improved notably recently, even with the small futures market rally.
No doubt, they do not want to repeat the slow start to exports like last year and with large carryover and a huge crop they cannot afford to get behind, particularly with winter coming and the inevitable freezing of shallow-water ports.
This could open a window of opportunity for US supplies into late fall/early winter with the drop in Australian supplies and slowdown in Russian exports. Prices in Europe, the other major exporter, have been well above world values for weeks, thus they have not been a major player recently.
While wheat could see the normal seasonal rally last longer this year, it will be tough to maintain a longer term bull market. The Russian supplies are simply too large and once spring arrives we will see them pick up exports again.
That said, it is worth noting that they are planting next year’s crop into dry soils in the Southern Region, where their exportable supplies originate. Here in the US, it looks like the southern and central plains will have a good planting season and wheat should be well established before dormancy.
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