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Wheat Finds Support, Even as Harvest Begins

After a gap lower start to the week, and sluggish trading for the next few days, wheat finished on a strong note with prices at or above the previous Friday’s close. Weather and demand both contributed to the supportive tone by the week’s end. 

It’s been a cool and wet growing season so far in the plains. Freezes and heavy snow have done their share of damage across a wide swath of hard red winter wheat country. There has also been plenty of moisture for most of the season, leading to disease pressure threatening yields and quality. 

But the rains haven’t stopped and much of the south’s wheat is ready for harvest. Early results show lower yields and protein than the average. Rains are forecast for the next two weeks and will surely do more damage if they come.

For the hard red winter wheat crop, yield reports won’t tell the whole story since so many acres were abandoned and mostly only higher yielding acres are left. Spring wheat plantings are finally catching up here in the U.S., but Canada is still behind. Already, the trade projects that trend-line yields will be hard to achieve for spring wheat with quality also a concern. 

We also see weather starting to create issues in other major producing regions. China is experiencing hot and dry conditions in the North China Plain, a major wheat, corn and soybean production area. The next two weeks are forecast for more of the same, which would create significant stress to crops. China has huge carryover stocks of wheat (supposedly), but their corn stocks are already projected to decline from last year about 20%. 

In addition, their wheat carry-over projection for this new year is 128 MMT, making up a whopping 46% of the world’s projected carry-over. With world carry-over up only 3 MMT over last year, even a slight drop in Chinese production/carry-over quickly pulls world stocks down from last year. So, even though China may not buy much wheat on the world market, what happens there is a big deal. 

Other weather issues are developing in the Black Sea region. Cold temperatures have set back some crops and delayed planting/establishment. Weather forecasts are calling for a hot and dry summer across southern Europe into Ukraine and Russia. That could spell disaster for late seeded wheat and corn, both of which are major export crops for those regions. 

Egypt returned to the market this week, with a hefty 295 TMT purchased from a variety of sellers, including the U.S. World prices have dropped just slightly from their last purchase in March, but sharply lower prices now make us competitive in that key market. It is worth noting that Egypt increased their protein requirements, which pushed France out of the running.

Fundamentally, the world needed a production problem to stop the bear slide – and we got that here in the US. It needs another production decline to wake up the bull – and that could be happening as we speak. Harvest in the plains could exert some pressure near term, but this will be a small and quick harvest and I don’t expect to see much pressure beyond mid-June. 

Technically, wheat is holding major supports at contract lows. Kansas City put in a weekly reversal higher and Minneapolis is starting to break out above a 3-month trading range. Large speculators continue to hold big short positions in grains, particularly wheat. If weather problems persist, those short positions will turn sour quickly and set the stage for a short-covering rally, which would probably turn into a rip.

The grain market is turning very interesting, and I think this summer will hold plenty of fireworks.

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