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Louise Gartner: Downward revision

After a tumultuous couple of weeks, wheat seemed to find a lifeline about mid-week that stopped the bleeding and set the stage for reversal back up. However, after a $1.50+ meltdown in the span of seven trading sessions, the technical damage is deep.

Turmoil in the Middle East is certainly partly to blame, but you can’t ignore the huge spec longs in wheat, corn and beans that also contributed to the flush of selling in the grain complex. According to the Commitment of Traders report, their net long wheat positions were quickly reversed and now large specs are net short again, a position they’ve always seemed to be more comfortable with anyway. 

China also added to the negative sentiment as they gave daily updates on the drought status of their winter wheat crop. It seems between recent rains and irrigation, the drought area has declined by 25% in the last two weeks, and their crop watchers are saying that, for now, the wheat looks fine. Wow, it wasn’t even a month ago when many were already writing off that crop and predicting major wheat imports for China. So much for drought damage when the crop is dormant.

It was very interesting to note that in one of their daily reports, China actually stated that even with a decline in production this year that potential imports would be minimal as they had at least one year’s production in carryover stocks. Really? USDA has China’s ending stocks at 60 MMT, just over half of last year’s production of 114 MMT. As usual, with China, you just never really know. 

On the positive side, the sharp drop in prices over the last couple of weeks certainly stoked demand. Export sales were a solid 1.1 MMT, just over the high end of expectations. Corn also had stellar sales at 1.6 MMT, much above the range of estimates. Soybeans couldn’t even make the low end of expectations with a paltry 252 TMT. Most of the Chinese soybean business has shifted to South America where harvest is in full swing. 

USDA added some spice to the markets this week with the annual Ag Outlook Forum on Thursday and Friday. They confirmed the acreage numbers that were suggested a couple of weeks ago, projecting a 10 million acre increase in total plantings, the second highest jump in plantings, second only to the 15 million acre increase in 1996. Wheat plantings are expected to be up 3.4 million at 57 million. Total production is projected to be 2.08 billion bushels, down 128 million from last year. Ending stocks are projected at 663 million, down 155 million. 

They also projected corn plantings at 92 million, up 3.8 million and the highest since 1944. Total production is estimated at 13.73 billion bushels, up 1.28 billion and a new record by far; but ending stocks are only expected to increase 190 million to 865 million, still a very tight number considering the demand base. Soybean plantings are projected at a record 78 million acres, up 600,000. They look for production to be 3.3 billion bushels, about equal to the last couple of years, and ending stocks up just 20 million to 160 million. So, despite big acres and big production estimates, it looks like grain stocks will remain tight for another year. 

The International Grains Council issued their world wheat production estimates for 2011/12. They look for the third largest wheat crop in history at 672 MMT, up 27 MMT over last year. 

Technically, the wheat charts pretty bad. Last week, we had huge outside weeks lower for the value markets of Kansas City and Minneapolis with major confirmations this week. Chicago topped the week earlier but not with an outside week lower; however, Chicago has broken several notable support levels. KC and Minn have just a bit more on the downside before hitting their major supports at the old double-top breakouts on the weekly charts. For the front months, those levels are the $8.23 level for KC and $8.30-8.35 for Minn. They should find solid support at those levels at least for the near term. 

Since the highs of Feb 9 to the low on Feb 23, Chicago wheat futures lost $1.70, Kansas City lost $1.50 and Minneapolis was down $1.65. Fortunately, cash prices didn’t see the same level of pressure as the futures. Winter wheat basis absorbed about one-third of the futures sell-off; and spring wheat basis absorbed about two-thirds of the break. So, while cash prices were lower they didn’t have the bloodbath that the futures did. 

Nevertheless, it does pose a dilemma for cash sellers. With the technical picture looking like a major top has formed in futures, it stands to reason that cash prices would also have made a high. But basis could continue to creep higher into the normal seasonal window of early May for winter wheat and early June for spring wheat. It sets up a potential way to price wheat; if a producer doesn’t want to outright sell cash at the moment, he could sell futures on rallies now, and look to price basis in those seasonal windows. 

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. Past performance is not indicative of future results.

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