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The Wheat Market Goes Splat!
There were two brutal days this week, Wednesday and Thursday, when selling swamped the grain complex.
A bearish supply/demand report on Wednesday started the meltdown, and then a change in the longer range forecast on Thursday prompted major selling and long liquidation, obliterating support levels on the way down.
USDA projected higher yields and production for corn, soybeans, and spring wheat than the trade expected. While they have acknowledged problems in spring wheat country, their estimate was still far above private estimates. Most analysts expect that final spring wheat production will be even lower than current USDA estimates.
Corn and soybean yields were higher than expected, and production numbers show still large crops, despite the difficult planting season for corn. Most in the trade expect the August supply/demand report to better reflect current production problems, but it was still a surprise to see production estimates so high.
Now that the crop report is behind us, the market turns back to weather for direction. For the last week, the major weather models were in agreement that the late-July period would remain hot and dry, but Thursday’s run suggested less heat and more rain chances in the second week of the forecast.
That was enough to send bulls running, creating waves of selling that melted through important gaps and support levels. Fund traders had been building a bullish position in the grain complex after taking a beating on the short side over the last few weeks. This week, they took a beating on the long side.
The weather models are not only having trouble agreeing with each other, but with themselves as well. After Thursday’s changed outlook and subsequent price collapse, Friday’s weather outlook appeared to bring back the probability of heat and dryness lingering in the western Midwest through late July. Obviously, no one knows for sure what will happen with weather during that critical time period, but we won’t have to wait long to find out.
The drought in the Northern Plains is intensifying and spreading. Southern Canadian prairies are seeing crop stress, much like eastern Montana and the Dakotas. We’re also seeing the dryness and heat encroaching into the western Midwest, where so much of the forecast variability is coming from. Spotty rains this week in the region have helped the crops, but many areas were missed, and this next 10-day stretch will see temps in the high 90s and low 100s in the central Plains into the western Midwest.
It’s all about weather for the next few weeks. Spring wheat will likely continue to lead, and winter wheat markets will follow spring wheat and corn. Soybeans have held their technical formation better than corn, suggesting it is in a better position to move higher. However, with corn pollination right in front of us and temps expected to soar, I don’t look for corn to fall behind.
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