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Early Wheat Rally Fades Late

Early in the week we saw wheat prices surge higher, only to lose much of those gains as the week ended. Poor world harvest weather and increased tensions in the Black Sea combined to offer support while the outlook for higher production and end stocks kept prices in check.

The fighting and rhetoric between Ukraine and Russia kicked up a notch this past week. Russia then imposed restrictions on agricultural imports from those countries that imposed financial sanctions against Russia. And on and on it goes…

Sanctions or not, Russia and Ukraine both had very good crops this year and both will be active in selling those crops. Harvest is near complete in both countries but trade chatter has Ukraine struggling with quality problems from rain on ripe wheat. So far, it looks like Russia’s crop has come in fine and quality is expected to be about average.

That will be an advantage for Russia as world supplies of quality wheat are shrinking with another rain plagued harvest across much of the Northern Hemisphere. Europe is a near disaster with much of the French crop, Eastern Europe and now regions of Germany all seeing quality downgrades. That feed wheat is headed directly to the market, further pressuring feed grain prices worldwide; it comes at a time when the bear market was already firmly intact as the market awaits the US monster crop.

Russia is poised to gain market share as quality buyers look for cheaper suppliers than the US. Brazil is a good example as they’ve been steady buyers this past year of US wheat because of its high quality; but this week we saw them cancel some sales from the US and announce that they will turn to Russian supplies if the spec’s work out. I would imagine they wouldn’t be cancelling US purchases if they didn’t already know what Russia’s spec’s were going to be. 

Even still, US exports continue at a healthy pace, and we’re very competitive in regions where transportation costs don’t kill us; that obviously does not include North Africa.

On Tuesday, we’ll get the August supply/demand report. Analysts are projecting a much larger corn crop than last month with yields and production off the charts. Soy production will also be record large with end stocks almost triple this marketing year’s end stocks. Wheat production is projected up slightly, mostly coming from spring wheat. World wheat stocks are expected to inch higher by about 1 MMT.

As we move beyond the report, the wheat market will focus mainly on the quality issues unfolding across much of the Northern Hemisphere. Supplies of high quality milling wheat are shrinking fast, and the cash market will likely soon be aggressive in protecting those supplies with higher premiums and bigger discounts. Normally, in years like this, we see a big spread between the premium and discounts right during harvest, then it quiets down during the winter, and then the spring typically sees a bigger move higher. Transportation snafus might disrupt than process but the bottom line is quality supplies will be very tight this year, and buyers will be anxious about getting their share.

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