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Wheat Stalls at Old Lows

Wheat markets traded in a narrow range this week after testing key resistance levels on Monday. Both Kansas City and Minneapolis rallied up to the old lows that had offered support through midsummer, but had broken down in late August. After Monday’s retest of those old lows, prices stalled and generally moved sideways for the rest of the week.

The supply/demand report on Monday was basically fine-tuning of the numbers for wheat. World production estimates were increased by 1.4 MMT with ending stocks lowered by 3.7 MMT. The EU had a drop of 2 MMT in production; surprisingly, China also saw a 2 MMT decline. Production was raised for Kazakhstan, Canada, and Australia.

USDA left the overall U.S. numbers unchanged but did adjust the classes of wheat. Most notable was the increase in exports for hard red winter wheat by 30 million bushels, with an equal drop in end stocks. Hard red spring exports were lowered 10 million with end stocks up 10 million; soft red exports were lowered 15 million with end stocks also increased by 15 million.

The adjustments reflect the quality issues here in the U.S. and around the world. We’ve seen exports for hard red winter be much better than the other classes as old-crop hard red stocks still have good quality.

The trade was mostly focused on corn and beans for the report. USDA reduced corn yield estimates by .7 bushels per acre to 174.4 bushels per acre with a drop in production of about 60 million bushels to 15.1 billion. Exports for corn were left unchanged at 2.175 billion bushels, and feed usage dropped 25 million to 5.650 billion bushels. Ending stocks for corn were lowered 25 million to a still very large 2.38 billion bushels.

Soybean yields were 1.7 bushels per acre higher than last month at 50.6 bushels with production up 140 million to 4.201 billion bushels. Exports were increased by 35 million and ending stocks were also raised 35 million to 365 million.

The bean yield was a bit more than expected, and soybeans responded negatively to that for a couple of days. Since then, most grain markets have quietly recovered and finished the week on a positive note. Moving forward, wheat will continue to be closely tied to corn values as we try to push lots of bushels into the feed channel.

That said, corn and soybeans both are looking at a very strong demand structure and little, if any, export competition for several months. Harvest pressure is likely to keep corn prices in check near-term, but yield reports from the southern Midwest are showing lots of variation and generally lower than the market expected. For soybeans, the Brazilian planting officially got started this week, but farmers are waiting for rains to come. The market is taking note of less-than-desired planting conditions in South America. Bullish news for soybeans is ultimately supportive for corn, and for this year, is ultimately supportive for wheat.

Egypt was back in the market this week with a tender on Thursday but got virtually no offers. Their on-again policy of zero tolerance for ergot has painted them into a corner as no country is going to offer wheat that has a 99% chance of being rejected at the Egyptian port. Russia has begun to retaliate with their own embargoes of other products, and Romania just simply refused to load a vessel that would have been bound for Egypt last week. For the world’s largest wheat importer to put themselves into such a situation is baffling indeed.

Seasonally, wheat usually has some strength as we move through September. So far, we do have a rally – if you can call it that. However, the overall bear market has stifled what little enthusiasm this market has been able to muster. And also, seasonally, as we move into October/November, the Southern Hemisphere’s harvest tends to pressure wheat prices into the end of the year. Because of the long-term bear market status, it would be recommended to expect that the seasonal highs will come early.

Another reason to expect a lackluster fall rally is the impending huge crop coming from Australia. Early production estimates put them at the 28 MMT level, up 4 MMT from last year and above current USDA estimates. With record world supplies already leaning on the wheat market, a big crop out of Australia would obviously add to the pressure.

As for Argentina, they produce high-quality, hard red winter wheat that will be in high demand this year. Their growing conditions haven’t been as ideal as Australia, but it’s still early. A shortfall there would really stoke cash prices for good-quality milling wheat and bring Kansas City futures along with it, which by the way, have steadily been gaining against Chicago since late June.


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