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Prices Spike but Can’t Hold
A bit of a wild ride this week in the wheat complex. A stronger start for the week morphed into a huge spike on Thursday, only to see it fail that same day and give up the whole day’s rally. Friday was slightly lower, and basically confirming the spike high failure.
The daily charts look terrible. Spike highs (or lows) almost always hold – at least short term. And the daily wheat charts are clearly showing a spike high.
As for the longer term weekly charts, they also show somewhat of a spike, but the weekly close was mid-range, so they don’t look as ominous as the daily charts. In addition, the Chicago weekly chart managed to close just above long term resistance, and at the highest level in three years. The Kansas City weekly chart took out long term resistance but didn’t close above it. Minneapolis still has a bit to go before testing longer term resistance.
The fundamentals turned much more bullish this week as harvest results across the Northern Hemisphere confirmed what we’ve been talking about for weeks. Indeed, the prolonged dry spell in Europe and the Black Sea throughout the summer took an even greater toll than expected.
Strategie Grains describes the situation in northern Europe as ‘catastrophic’. Germany’s average temperatures for May were the highest since 1881, scorching the crop early. And we haven’t gotten to the UK, yet, where they’ve experienced the driest summer in recent history. The European Commission is speeding up payments to farmers in response to the drought’s financial effects.
The Black Sea region isn’t much better, which was also plagued by the same weather issues. Indeed, it was rumors of Ukraine halting wheat exports that shot the market higher on Thursday. When the government clarified that they weren’t halting exports (yet), that they were just establishing agreements with their exporters as to how much would be exported, and to insure none of Ukrainian wheat would move into Russia.
Why would Ukrainian wheat move into Russia? Perhaps Russia is short as well? That would be a reasonable answer considering their dry spring/summer, and now rain on mature wheat still in the field. Reports from Russia show quality is taking a big hit with widespread sprout damage. Protein levels in exportable position are averaging in the 11’s, not good enough for the 12.0-12.5% that the world market wants – and that they’ve contracted.
Russian FOB prices have moved strongly higher over the last few weeks, pulling world prices and US futures prices higher as well. Russia has been aggressively selling wheat for export, and it was expected that they would run out by the time their ports froze in winter. Now, some are wondering if they will even be able to fill those obligations with sub-par quality supplies coming into the pipeline.
It is remarkable how fast the wheat fundamentals shifted this year. After several years of record world production and carry-out stocks, in a matter of a few months we are seeing world wheat production at a 5-year low and combined stocks/use ratio of the major exporters at an all-time low. Considering the harvest results of the last week, those statistics are only getting worse.
There is some heavy lifting to do in the wheat space - buy more acres and ration demand, particularly for quality supplies. How will the market buy more winter wheat acres when those acres are still in other crops? Southern Hemisphere production is very much in question given the current status of Australian conditions and an El Nino coming in the fall. Have prices risen enough to ration demand? Unlikely.
The wheat market has finally awakened from a bearish/flat market stupor to a raging bull. Yes, we got a spike high on the daily charts, and perhaps prices are headed for a correction in the near term, but this bull market is far from over.
Owner, Spectrum Commodities
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