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Wheat Seen to Move Sideways Through Winter Months

Technically, wheat looks to respect the $4.00 level.

Wheat started last week with follow-through selling from the previous week’s pressure, and after a new low early on Tuesday found a bid that attracted more buying into Friday’s close. Thursday’s deliveries in Chicago were heavier than expected, but the price pressure was short-lived. Kansas City closed the week with a nice reversal up on the weekly chart, with Chicago almost getting a reversal and Minneapolis struggling to find a direction.

It could be that index funds gave the market a boost from ‘first of month’ buying, but there is also evidence that managed funds are reducing their short exposure in the grain complex, likely taking down position sizes before the holidays.

World cash prices continue to leak lower. Last week, Egypt bought 120 TMT of Russian wheat at an average price of $206.43/MT CIF, about $1.80/MT lower than two weeks ago. Lower freight rates were part of the weakness. The lower prices are attracting lots of business, however. Algeria bought 570 TMT of French and Argentine wheat, Iraq picked up 100 TMT – 50 TMT from the U.S. and 50 TMT from Australia. Ethiopia bought 400 TMT, and Saudi Arabia is in for 480 TMT.

The U.S. is generally competitive with most other offers. Hi-pro wheat is still bringing a premium and becoming more short supplied. European hi-protein’s are priced way above other offers, effectively taking them out of the market. Argentina and Brazil have run into quality problems in their crops, and Brazil will need to come to the broader world market for high-quality wheat.

Australia is running into serious quality problems in the southeast. Wheat is mature, but heavy rains are delaying harvest, with some 4 MMT at risk of at least quality declines and potential outright losses. After a disastrous growing season from drought, now they face more losses due to rain.

Argentina’s harvest is about 35% complete and forecasted dry conditions should allow it to progress quickly. Those same dry conditions are ramping up concerns about the corn crop just starting to take off. The chances of a La Niña event for the next few months are increasing, and a significant drop in eastern Pacific Ocean temperatures are suggesting that it could be a more intense event than originally expected.

That would suggest further dry conditions across the heart of Argentina’s corn belt and up into southern Brazil during the key growing months. It also suggests more dry conditions for the U.S. southern Plains region, which is already trending dry and suggesting not much snowfall for the already stressed winter wheat crop.

Export sales last week weren’t expected to be high, and that expectation was met with only 187 TMT sold, less than the low end of expectations. It was a short week, but still, we need better numbers than that. I think we’ll get them, with prices competitive and declining competition from Australia and likely Russia this winter.

USDA released baseline projections last week. For next year, all wheat plantings are projected to be 45.0 million acres, down 1.0 million from year’s record low. Production is expected to be 1.815 billion bushels, up 74 million over this year, with ending stocks pegged at 813 million bushels, down 122 million from last year.

Technically, wheat looks like it wants to respect the $4.00 level, seeing as we got a nice bounce near those prices. If we can get some follow-through buying to support Kansas City’s reversal, it will likely lead to more fund short covering, particularly heading into typically quiet holiday markets.

That said, the hiccup the stock market had Friday illustrates the nervousness in the financial markets, which could easily spill over to commodity markets. Generally, I expect that wheat will move sideways through the winter with Kansas City and Minneapolis moving back into their trading ranges this week. Chicago isn’t quite there yet, but does appear to be finding support from corn.


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