Too Much Going Right for Grain Rally, Analyst Says
Like this week, grain markets were under pressure last week, with good rains in the northern Plains/Midwest and increased fears of trade wars squelching any bullish enthusiasm.
Minneapolis led the way lower for the wheat complex, with good rains over parched areas removing concerns of developing drought.
Harvest is quickly moving along in the Plains, with combines rolling in the key state of Kansas. Protein reports are generally good, and yields are averaging about as expected around 25 bushels per acre. The very hot May pushed the lagging crop quickly to maturity, and harvest is expected to advance rapidly with acreage abandonment high, especially in the west.
In the northern Plains, very good rains fell on the key dry areas of North Dakota and the southern Canadian prairies over the last couple of weeks, giving the young spring wheat crop a big boost and explaining why Minneapolis was the weakest market of the wheat complex.
Last week’s row-crop prices on corn and soybeans were also significantly lower on good rains over much of the Midwest and the ongoing, and apparently intensifying, trade spats with China, Canada, and Mexico. In mid-May, it looked like the trade issue was going away and the U.S. would be on track for a large increase in sales to China. Now we’re hoping that there isn’t an all-out trade war. The disappointment over the breakdown in trade talks pulled the rug from corn and beans, prompting huge corn/wheat spread unwinding that at least temporarily supported wheat but pushed corn and soybeans into new lows.
Still, the major driver of wheat’s price action is the increasing dryness situation in the Black Sea. The dry region is huge, reaching from eastern Europe through Ukraine, across the southern region of Russia, through the Volga region and into Kazakhstan. This is major grain producing country, and production estimates are dropping rapidly.
Last week, Ukraine farmers projected that wheat production would be down 15% to 30% from early estimates. Russian estimates are also declining, with recent reports around 71.5 mmt, down 2 mmt from early estimates and sharply lower than last year’s record 85 mmt.
China is showing up on the radar for potential weather issues as well. Dryness developing in the North China Plain is helping winter wheat harvest but hurting corn production. The dryness appears to be expanding into the northeast region of China, a major spring wheat and corn production area.
World wheat production was already in decline this year, but the weather issues in major producers like Australia, the U.S., and now the large region around the Black Sea could take this year’s world production sharply lower.
Corn could be an issue as well. Argentina, the world’s second-largest exporter, had a very poor crop. Ukraine has become the world’s third-largest exporter of corn, most of which goes to China. Their dryness is certainly affecting the corn crop as well. It’s worth keeping an eye on the corn market for direction for wheat. The things keeping corn prices on the ropes are near-record high crop conditions here in the U.S. and the trade spat.
Understandably, it’s hard to think that wheat could stage a rally from here, there just doesn’t seem to be enough energy in the rallies to sustain themselves. But much of the pressure is also stemming from corn and soybeans and the major long liquidation by fund managers. Still, we can’t ignore what appears to be developing drought in the Black Sea, and who knows where grain prices would go if China’s dryness sticks around.
The grain charts look terrible, the row crops here in the U.S. look fabulous with little weather threats anywhere, and trade spats are a major bearish component. Why be optimistic? Maybe one shouldn’t be. But again, I would not ignore the weather issues developing around the Northern Hemisphere as we get into the heart of the growing season for most crops.
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