So much for upward grain price momentum, analyst says

Most big wheat exporters have moved to the sidelines.

Well, so much for the upward momentum. This week we saw the entire grain complex get a major price wipeout, with most of the pressure coming on Friday.

For wheat, Chicago led the way down with a drop of 41¢, Kansas City dropped 30¢, and Minneapolis fell 31¢.  Corn briefly touched limit down on Friday but did not find a lot of buying there as it closed just a penny off limit down, losing 31¢ on the week. Soybeans gave up a big chunk of their gains with a drop of $1.05.

Much of the selling was fund related, as the selling kept triggering more sell orders. Wheat ran into some fundamental selling as Russia decided not to impose export quotas, just keep the tariffs in place. In effect, if world prices rally to match Russian FOB offers, then Russian wheat is back in play as an export option. 

It is highly unlikely, however, that the Russian government will allow wheat out of the country if farmers are still holding tight and domestic prices continue strong. The whole point of them imposing tariffs in the first place, after a record crop no less, was to stoke farmer selling.

We will see how that plays out. At some point, farmers will have to sell something as they prepare for the planting season. But with ample storage space and dry conditions for winter wheat, farmers fear a short crop this coming season and will likely hold as much as they can.

Bottom line for wheat, because of production shortfalls in Russia, Europe, Argentina, and to some extent Ukraine, most of the world’s biggest exporters have moved to the sidelines. Russia’s initial 25-euro/MT export tax ($.83/bu) quickly pushed world prices to the tariff level, making Russian wheat competitive again after only a week or so. The Russian government stepped in again by doubling the tariff; this will surely slow the exports. But with so little competition, world price will likely work its way to the new tariff level again. 

To break this bull market requires good yields across the Northern Hemisphere this season. Not impossible, but dry conditions currently linger in key growing regions in the Black Sea and the U.S., so it is not a slam dunk, even with record Russian plantings and a decent-size jump in U.S. plantings.

Let’s not forget the major demand-driven bull markets in corn and soybeans, which is certainly helping to fuel the bull fire in wheat. This spring, farmers will plant fence row to fence row, weather permitting. They will focus on corn and beans, and I think spring wheat will get caught in the crossfire as the Dakotas and Minnesota look at more promising returns for the row crops than spring wheat. I look for Minneapolis to keep improving against Chicago. 

Kansas City, too, will likely continue to gain against Chicago even though that spread has already had a very impressive run. Russia raises hard red winter wheat; thus, its absence would understandably support Kansas City. However, historically, the more liquid market has been Chicago, and the last Russian drought sent Chicago sharply higher. This time, even with the strength in corn and soybeans, Chicago wheat could not out-perform Kansas City. That says a lot about the underlying fundamentals in hard red winter wheat, and that the fund/speculative community is willing to trade big positions in Kansas City futures rather than migrating to the more liquid Chicago futures market. 

So, while we’re getting a correction, I don’t think the bull market is over for any of the major grains. Demand is obviously not being rationed, and this break will only encourage more U.S. sales, further tightening the already very tight balance sheets in corn and beans. Sky-high world feed grain prices are pulling wheat into feed rations, threatening wheat supplies as well.

It might take a week or so for grain prices to stabilize, but the longer-term trend is still up.

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