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Potential Biofuel Changes Offer Wheat Support

Grain markets had some excitement this week when rumors swirled about changes to the Renewable Fuels Standard program. In short, there appeared to be an agreement between the White House, the ethanol industry, and major refiners about who would be responsible for the blending requirement. There was also talk that E15 would be permitted all year and that biodiesel tax credits would only be given to domestic production. While the White House denied there were any changes forthcoming to the program, private industry participants insisted that, indeed, changes were on the way.

Initial market reaction was strongly higher, led by soy oil, which would be the biggest beneficiary if these particular changes were implemented. Corn was right behind, not only to keep up with soybeans but also on the chance that ethanol consumption – and thus corn demand – would move higher. If corn is moving higher, so will wheat.

So, we had a big surge higher on Tuesday morning in reaction to the rumor, only to see most of those gains erased by the close. However, the rest of the week we saw prices claw their way back to near Tuesday’s highs but not able to move above them. Once the trade had time to digest the rumors and to recognize that they were still just rumors, the enthusiasm waned, especially when they looked at the time line of when such changes might be implemented since it takes changes in government policy. And that is not exactly a fast thing.

Wheat did find outside support, however, from yet another Egyptian tender this week, the third tender in two weeks. They ended up buying 535 TMT of Russian, Ukrainian, Romanian, and French wheat with an average price that was about $2.30/MT higher than the previous week. Over the last month, they’ve purchases almost 1.3 MMT of wheat. Talk of slow farmer selling to the Egyptian government and a weak currency have made it difficult for private millers to secure enough wheat for the subsidized bread distribution program, and the government is stepping in to help. Even though harvest is only about a month away, some suggest that Egypt could be in for even more wheat before that harvest begins. 

Our own export sales continue at a healthy pace. Last week, 452 TMT were sold, mostly from the quality hard wheats of hard red winter and hard red spring. Year-to-date export sales for the U.S. are 38% ahead of last year at this time. We’ve also sold 90% of the projections for this marketing year, compared with the 92% average. Last month, USDA increased its projected wheat exports in its supply/demand report. There will be another supply/demand report next week, but the trade is not looking for any notable changes to the trade outlook.

The trade is increasingly looking at weather in the Southern and Central Plains, particularly since the crop is already growing strong up into central Kansas, a good three weeks ahead of schedule. Moisture conditions have been dry across much of hard red winter wheat country throughout the winter, and the next two weeks call for more of the same – along with much above-normal temperatures. It may be too early to predict stress to the crop, but those conditions could create issues by the time late March rolls around.

Crop conditions have shown deterioration in the wheat crop over the last couple of months. Again, it’s still early, but moisture demands will increase significantly if temps stay high. We’ll see how that evolves, and the market will give it some time. But, large traders are already long Kansas City wheat, and if the longer-range forecasts verify, then traders will be quick to add to those positions. If rains show up, then there will likely be a great deal of liquidating, setting up a tricky scenario as we head into growing season.

Technically, we had reversals up on the weekly charts, except for Minneapolis wheat. Corn had an outside week higher as did Kansas City wheat. These are potentially bullish chart patterns that warrant attention, especially as we near the end of the normal seasonal decline time window. Weather will be the main driver, which also has a bullish slant to it. 

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