Wheat Fails to Stay in Old Trading Range
A strong start to the wheat complex this week quickly ran out of steam, and markets weakened into the end of the week. A sharply higher dollar, Southern Hemisphere harvest, bitter cold in the U.S., and record ethanol profits supporting corn are combining to keep wheat prices moving in a choppy, uncertain direction.
Demand has remained a bright spot for wheat’s fundamentals. Export sales had another strong week with 564 TMT sold. Spring wheat had the best performance with China buying 60 TMT and unknown buying 124 TMT. Total wheat export sales so far this marketing year are running 33% ahead of last year. They’ve also reached 76% of USDA’s projections, ahead of the average of 73%. It is looking increasingly like USDA will need to raise export projections in upcoming supply/demand reports.
Harvest is moving along in the Southern Hemisphere without much interruption. Argentina is reported to be about 47% completed, so far collecting 7.2 MMT. USDA is forecasting them to produce a total of 14.4 MMT.
Russia is reporting its grain exports are down in December due to a stronger ruble and rough weather. They expect to export 3.4 MMT of grain in December, down from November’s 4.0 MMT and down from last December’s 4.2 MMT.
Weather has become an issue for the wheat complex, with bitter cold bearing down on the northern and central Plains. Most of the north should have at least a light blanket of snow to protect wheat from this latest round, but an earlier cold snap likely did some damage on wheat that was not well covered through parts of central Montana. The central Plains, too, are vulnerable with this latest push of arctic air reaching as far south as Texas, regions that just earlier this week saw temps in the 50s. There should be some snow coming with the system, but the crop is at risk with just light snow in many areas and temps well below zero.
The central Plains have trended dry over the last couple of months, and longer range weather forecasts call for the dryness to continue through the winter into late March. That will be a critical time frame as most central Plains wheat will have broken dormancy by then and moisture demands will be increasing quickly. If the La Niña fades as expected into March, a better rain profile is expected to occur through the Plains. Spring will be interesting, indeed, to see what kind of winter kill there is and if the rains will come.
The U.S. dollar had a big impact on price action this week. The FED finally raised interest rates at its December meeting, which was widely expected. However, it also announced it would raise rates another three times during 2017, which shot the dollar sharply higher, reaching a 14-year high. The strong dollar is creating headwinds for all U.S. exports, and that is especially true for grains where U.S. farmers are highly dependent on exports.
Looking at the charts, Kansas City tested the old trading range lows three days in a row this week, but couldn’t break the resistance. Chicago managed to get back into its trading range last week, but couldn’t do anything with it, and by the end of this week was back below that old range. Both technical formations suggest more bearish price action is likely. Even Minneapolis, by far the stronger component of the wheat complex, is showing some signs of waning momentum, with prices unable to push beyond the late-November high despite several attempts this month.
Looking ahead, the holidays will likely slow down trade activity. However, once traders refocus in January, wheat will still be facing the same uphill battle: huge U.S. stocks and record world stocks. Corn stocks are huge as well, but record ethanol profitability appears to be supportive, at least in the short-term. The dry conditions in the central Plains are worrisome but won’t be a market mover unless they linger into spring.
With the inability to regroup into its old range, it appears that wheat is finding a new trading range – unfortunately, at a lower level. It will take a major shift in fundamentals to spark a lasting rally, and with Southern Hemisphere crops all but assured, it looks like spring weather will be the first opportunity for that to happen.
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