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Wheat Holds Weather Premium

Weather is the main driver of price action.

Wheat markets chopped back and forth during the week, with Chicago managing to eek out a new high for the move, but not quite so for Kansas City. Minneapolis bumped along the lows established over the last few months.

World wheat prices have rallied on the heels of higher FOB prices out of the Black Sea but also on higher feed grain prices worldwide. The deepening drought in Argentina is helping soymeal soar to 20-month highs, and that has helped to lift all boats in the feed grain space, including feed wheat. So, while high quality wheat supplies remain tight, the lower quality wheat is finding strong support as well. Basis has improved here in the US, in Canada and in Russia as logistical issues caused by cold weather is slowing grain movement.

Weather, of course, is the main driver of price action in the past few weeks and looks to remain so for the near term. The LaNina weather event is having a profound impact on major growing regions around the world. It is being blamed for the drought in Argentina, which has intensified in the last few weeks and caused corn and soybean conditions to decline rapidly these last couple of weeks. The Buenos Aires Grain Exchange issued their bi-monthly crop condition report this week, showing a further decline in ratings. Soybeans were rated 56% poor/very poor, a bump of 36 points since last month. Just 11% were rated good. Corn ratings showed poor/very poor at 58%.

LaNina is also being blamed for the persistent dryness across the US southern plains, where most regions haven’t received notable moisture since last October.

NOAA’s longer-range weather models suggest more of the same for the key growing regions of the southern and central plains, with both the 1-month and 3-month outlook suggest below normal precip and above normal temps for the southern and central plains, worsening the further south you go. As for the northern plains, the models suggest good precip and below normal temps for the next 30 days. That could attract more spring wheat acres.

Weather conditions in the major growing regions of Europe and the Black Sea are generally fine for grain production so far this winter, with the moisture profile in mostly good shape. It is unlikely that Russia will produce another monster wheat crop, but I wouldn’t rule out big crops as their productivity is clearly on an upward trajectory. So, as far as potential weather problems go, it is mostly here in the US and possibly Canada with the lingering drought in the northern tier that the market will watch – against a backdrop of record world carry over of all wheat, and tight supplies of high quality wheat.

Export sales were respectable last week at 422 TMT combined for old and new crop. Of the total, hard red winter was 131 TMT (31%) and hard red spring was 110 TMT (26 %). China bought 33 TMT of hard red spring wheat. Marketing year sales so far stand at 21.3 MMT, down 2.9 MMT from this time last year. Yea-to-date sales are running at 82% of USDA’s projections with the 5-year average 89%. Thus, even with the reduction in projections in last week’s supply/demand report, we’re still running notably behind the pace to meet current projections.

Seasonally, there is a strong tendency for wheat to rally into early Feb, then stall out and head south into late Feb/early March. We’ve clearly got the first part of that down, now we wait to see if we get the pullback. The market has done a good job of holding the weather premium longer range weather models don’t offer much relief to dry soils.

Normally, the break in grains in late Feb is caused by farmer selling as they need to generate cash for the upcoming growing season. The strong futures and basis are offering a nice opportunity for them to do just that. We’re also closely watching Russian farmers who are in the same position, but are sitting on a great deal of grain, following four record wheat crops in a row. So far, Russian domestic and FOB prices have moved higher into late winter, as their exports continue strong with good weather. We’ll be closely watching Russian interior markets for signs of increased movement that could pressure world prices.

That said, given the crop conditions here in the US and the weather outlook, I would expect prices to be well supported on breaks. The Kansas City/Chicago spread had narrowed a bit early in the week, but late in the week resumed its upward move. I expect that there is more to that spread as we get into the growing season.

Basically, at this point, it is a matter of respecting the seasonal tendency, which the market has followed well so far this year. That suggests some downward price action into late Feb/early March; then we’re trading weather as the growing season kicks off. This year has the ingredients for some volatile price action if weather doesn’t improve quickly here in the US.

For daily commentary and hourly market reports on wheat and cattle, listen to my podcast at:

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