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Huge Week for Wheat, Shaky Finish

Short position by large traders gets smoked.

Wheat saw its biggest one-week rally in nine months as weather continues to dominate price action. Extended dryness across the US central/southern plains is threatening an already stressed crop as it begins its growing season. Kansas City was up 53 cents on the week, Chicago up 40 and Minn up 6.

Wheat futures finally took seriously the poor condition of hard red winter wheat after the latest crop condition ratings this week showed further deterioration across the key central and southern plains. Added to wheat’s woes was widespread flooding across much of soft red winter wheat country, threatening a crop that until now looked fine.

We will start seeing weekly condition reports that will keep us better updated on crop condition and progress. Near term weather forecasts show very little chance of rains in the plains over the next 10 days, and wheat is greening up from Texas to central Kansas.

Also supportive to the grain complex this week was the ongoing drought in Argentina that is already the worst in 38 years. With virtually no relief in sight as corn and soybeans move through their pollination periods, production estimates are plummeting for both crops, and prices posted new highs for the move in response.

Russia is experiencing an intense cold snap that is stalling grain movement into port locations, creating loading delays for wheat and feed grains. Russian prices have since moved higher, pulling world prices higher as well.

Likely the biggest push for wheat futures this week was the short position by large traders that got smoked on this latest rally. They have turned bullish on the row crops and certainly less bearish on wheat over the last several weeks. But this week they pitched their short wheat positions all at once, creating a familiar chart formation of a quick, sharp run – and then nothing.

Despite the increase in world prices, US wheat prices have shot up much higher and faster, effectively pricing us way out of the export market. Even before this week’s impressive rally, export sales were declining. Only 236 TMT of wheat sold last week, far less than is needed to meet USDA’s projections.

Marketing year-to-date sales are running at 84% of expectations, compared to the average of 92%. So, despite USDA lowering export projections in Feb’s supply/demand report by 25 million bushels, we’re still running way behind the pace needed to meet even those lower objectives. With the rally this week pushing US prices sharply higher, it takes us further away from meeting those objectives.

The market got another shot of uncertainty this week after President Trump announced import tariffs on steel and aluminum. While those two products may seem unrelated to wheat, the prospect of a trade war sent waves of fear through the grain complex – and in particular, wheat.

The tariffs are targeted at China, but several other steel producers are getting caught in the net. China is already talking about retaliation, along with other countries. Keeping in mind that US agriculture has a large net trade surplus – it could easily become a target in a trade war. With Argentina’s drought, world supplies of corn and soybeans/soy meal are tighter than normal. Demand for US corn is enjoying a resurgence as a result. That leaves wheat, with a record world surplus and numerous competitors.

Wheat will likely be the most vulnerable in a trade war, and it comes at a time when US prices are already much higher than world prices. That could help explain the sudden deflation on Friday after a 60-cent run in Kansas City this week. Chicago and Minn took the hardest hit on Friday, as weather problems aren’t as much of an issue now.

Last but not least, the CBOT announced that Kansas City wheat will see its variable storage rate increased from 6 cents to 8 cents. This may not seem like much, but the cash pipeline is already tight due to wheat being stuck in storage facilities, helping to explain the strong basis in the central plains. The increased storage rate will obviously encourage yet more wheat to stay in storage. With a likely short crop of hard red winter wheat on the way, basis will have to work its way higher yet to keep cash moving.

Technically, the wheat rally has lasted much longer than the normal seasonal tendency, suggesting that, at least, we are no longer in a bear market, and one could argue that we’ve entered into a bullish market. I’m not ready to make a bullish stance just yet, especially after the price action this week. The sharply higher price action followed by the quick deflation on Friday has a strong look of a blow-off type of trade, suggesting an important high was likely forged this week.

If we do get a pullback, look for prices to test the mid-February high breakout, with the next support at the early Feb low. If rains don’t come, the pullback will likely be short. If the rains do come, it will be difficult to rally wheat. Spring wheat has struggled to even resemble the rally in the winters, with the market talking about a notable increase in plantings shoring up tight quality supplies. That said, it does see solid support at the $6.00 level.


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