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Wheat Holds Support on Demand, Weather

Wheat started the week a bit shaky, with pressure coming from a major miss in an Egyptian tender. We thought we were competitive in the key North African market but realized this week that we weren’t really all that close.

On Tuesday, Egypt bought 360 TMT, 180 TMT from Romania and 180 TMT from France. The prices paid ranged from $261-265 delivered, which was down as much as $4/MT from their most recent purchase on January 8. U.S. offers were $10/MT over for soft red winter and $16/MT over for hard red winter. That surprised the market and futures sold off in response.

It is worth noting that Russian offers were not competitive, either, also a surprise to the market since they are usually the cheapest. Cheaper freight costs and an updated payment system for Egypt allowed them to pay less for this purchase than in early January even though world prices have moved higher.

After the break on Tuesday, futures stabilized for a couple days and finished the week with a strong Friday rally. Chicago finished the week 4 cents higher, Kansas City 1 cent lower, and Minneapolis 1 cent higher. Doesn’t seem like much to show for an active week of trading.

Cash markets, however, are beginning to make a move. Basis levels at export locations have steadily moved higher, and gulf basis bids have mostly eliminated the carry. Clearly, there is business being done in the export arena, we just don’t have the data to show us what or how much due to the government shutdown.

We finally did get an export sales report this Thursday dated for December 20. Wheat sales were a robust 602 TMT, a good number to get things rolling again. Hard red winter wheat sales were 244 TMT, 40% of the total. Spring wheat sales were 182 TMT, 30 % of the total; and soft red winter was 75 TMT, 12% of the total. Private Egyptian buyers bought 170 TMT, of which 108 TMT was hard red winter and 50 TMT hard red spring.

Weather was an important factor in price action this week. A massive polar vortex descended upon the Northern Plains into the Midwest, bringing record threatening cold to almost every place it touched. The southern Midwest had little snow cover to protect wheat and weather experts are suggesting a high likelihood of some winterkill in that region. Hard red winter was thought to be spared as most of the cold stayed east of the major production areas that had no snow cover.

In response, Chicago spent a couple of day gaining against Kansas City but gave it all back plus some by the close on Friday. One does have to respect that damage to soft red winter could support Chicago futures, but we simply won’t know that damage until spring.

In the meantime, demand is coming for milling grades and it’s coming to the U.S. Hard red winter and spring wheat stand to gain from what could be a major shift in world demand, particularly as it appears that Russia has moved to the sidelines.

It is also worth remembering that hard red winter wheat isn’t in the best of shape, either. With late – and likely reduced – plantings and poor establishment, that crop has its own set of potential production problems. Again, spring will bring us those answers.

Technically, the early week pullback tested support levels and held, establishing a solid base of support before pushing higher late week. Fundamentals continue to flash bullish signs and the chart formations are lining up that way as well. Seasonal tendencies often see a rally into early February, to around the 10, which would line up with the February 8 data dump from USDA. We typically then get a pullback into late February before starting a rally into the spring, which often brings a seasonal high in early May.

I would look for that type of price action over the next few months, with demand pulling us higher initially, followed by a push for acres in spring wheat into early May. During that time, we’ll also see how the winter wheat crops are faring.

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