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Analyst: Wheat Market Rolls Lower

Chicago wheat gapped higher to start the week, with Kansas City following higher. But that was the only bullish action for the week, as prices turned south and steadily moved lower for the week. Minneapolis started out weaker, but did manage to find some strength against the winter wheats late in the week.

The crop report for the U.S. only had adjustments for U.S. imports, down 10 million bushels. Thus, ending stocks were also lower by 10 mb. However, world production was increased by 2.8 MMT, mostly from Australia with a 2.0 MMT increase to a record 35 MMT. Argentina also got a bump of 1.0 MMT to 16 MMT. Both also saw an increase in exports – Australia up 1.0 MMT and Argentina up 1.2 MMT. Canada had a decline in exports of .5 MMT due to slow sales this year.

Now that the crop report is behind us, the market will focus on new-crop production. Hard red winter wheat across the southern and central Plains is off to a rough start as much-above-normal temps brought the crop out of dormancy very early, and now dry and windy conditions are adding to the stress level.

The only thing keeping Kansas City wheat prices in check is a forecast for rains starting around March 20. Those rains are needed, and the crop won’t last long if they don’t materialize.

Export sales were just OK last week, with 432 TMT sold. Year-to-date sales are running 37% ahead of last year, but after the USDA raised export projections by 50 million bushels last month, suddenly we’re behind the pace needed to meet those projections.

We can expect stiff competition in the export market this spring, with both Russia and Australia producing record crops. Russia is far behind in their export pace and as temperatures warm and shallow-water ports thaw, their exports will improve. As mentioned above, Australia and Argentina got a bump in their production and export estimates, and we’ll be seeing more of them as well.

It is worth mentioning that this week, Egypt rejected two cargoes of Russian wheat and one cargo of Argentine wheat at the points of origin, presumably for quality issues. Argentina was largely considered to be the only other major supplier of good-quality milling hard wheat outside of North America (and supplies are tight here as well). We knew that they had a large amount of their wheat that was low quality due to heavy rains during the growing season and harvest. Now, it looks like they’ve moved most of their good quality to Brazil per their trade agreement and don’t have much to offer to the broader world market. 

The quality issue is not going to go away soon, and likely we will see the strongest move as we get into the spring markets of early May through early June.

It is encouraging to see world demand remaining strong, with Egypt having purchased a total of 1.25 MMT over the last month, and now a big tender of 720 TMT from Saudi Arabia and another tender of 75 TMT from Tunisia. But with world stocks at record highs (and increasing), it will take more than demand alone to turn wheat into a bull market.

There will need to be a production shortfall in at least one major exporter to get more enthusiasm in this market. It could certainly happen here in the U.S., but we’ll have to see if the rains come. The rest of the Northern Hemisphere is looking good so far, with adequate moisture across most of Europe and plenty of moisture in the Black Sea region. Russia could have a problem with too much water if the vast amount of snow they have melts too fast. 

Technically, the wheat market obviously got no follow-through on last week’s reversal higher. From a seasonal perspective, we could easily move lower for another week or so before the market considers building in a weather premium.

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