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Russia is still a fierce competitor

Wheat reacted negatively to USDA's crop report as the bullish numbers weren't as bullish as most thought they'd be.

Prices opened lower and quickly ran into more liquidation before staging an impressive comeback to trade slightly higher early in the session. The rest of the day was choppy as it tried to find a direction amid ever-tightening world and US stocks, weakening European prices and plenty of nervousness infiltrating from the financial markets.

USDA's crop report lowered US wheat production by 24 million bushels (mostly from winter wheat) and lowered US ending stocks by 14 mb to 404 mb. World wheat production was lowered 1.9 MMT to 610 MMT, with world ending stocks down a like amount to 114 MMT. This keeps world stocks at 31-year lows and stocks/use at all-time lows.

While that's not exactly news to the marketplace, it does continue to underscore the extremes of this wheat situation; and that's not considering that a growing percentage of the world crop is declining in quality, making the milling stocks situation even more dramatic. European prices have skyrocketed to all-time highs for that very reason- not enough quality stocks to go around, with suppliers caught short and severely squeezed as they had to buy back positions in a market that had very few sellers.

While price action lately has struggled to maintain that high level of upward energy, it still has yet to run into any kind of aggressive, confident selling. Some buyers are still there whether prices break or not, and many show up if prices do pull back. Egypt has been a very consistent buyer with purchases every week.

However, it won't be lost on the trade that for the last two weeks Egypt's purchases have gone entirely to Russia. Looks like Russia's back in the game - and will remain a presence for some time as USDA raised their wheat production .5 MMT along with their exports. Russia has been a fierce competitor in our export market, and they are no doubt eager to take advantage of record high European prices. Even though their prices are higher than US prices, it's the shipping costs where they have the obvious advantage.

Nevertheless, US export sales continued on a heated pace last week with another 890 TMT sold. Total sales so far this year add up to 13 MMT, almost double last year's pace of 7 MMT. USDA acknowledged this pace by raising export projections by 25 million bushels to 1.075 billion bushels.

Usually the wheat market doesn't get too wrapped up in other market activity other than corn and maybe some distant feed grain action. However, the mess the financial markets are finding themselves in could easily spill over to wheat along with the other grains. Not the least of the reasons would be the rising US dollar from the flight to quality we're seeing, making US products (like wheat) more expensive for importers.

Also, and again not the least of the issues would be the huge fund involvement in the futures markets. With wheat's long term bull market, funds have a large net long position, as they also do in corn and beans. In addition, the wheat/corn spread is well into all-time highs with plenty of traders waiting to sell that potential fortune-maker.

My point is, bullish fundamentals notwithstanding, wheat could go into a liquidation phase for reasons that don't exactly fit the supply/demand formulas and leave these price levels behind regardless of world supplies and bullish attitudes. The financial market woes are wide-reaching and if they don't find stability quickly, everyone will feel their impact, and it won't be bullish.

Whether wheat prices breach the all-time highs just above us I can't say, but these prices are great selling levels – even if they do happen to go much higher. And don't forget about '08 and '09 either. Price incentives are huge for another year of increased plantings.

This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. Futures and options trading always involve risk of loss.

Wheat reacted negatively to USDA's crop report as the bullish numbers weren't as bullish as most thought they'd be.

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