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Louise Gartner: Grain trade fodder

Grain markets had plenty of
action this week as a variety of fundamentals stayed at the forefront. Weather
was a concern again this week both here in the US and abroad; tightening food
supplies; the near saturation of media attention to food and grains; the
steadily evolving situation in Egypt; and of course the supply/demand report
that goosed prices mid-week.

Where to start. Well,
weather continues to grab traders’ attention even though the crop is dormant in
the areas with extreme conditions. Nevertheless, the US western plains still
have little or no snow cover and they experienced their second major cold snap
in as many weeks. Record lows in Oklahoma, a mind-boggling -31F could certainly
do damage to wheat that was already stressed. Next week, temps are expected to
quickly warm up, which could create more stress. While the northern plains got
another shot of cold, they have more than adequate snow cover. They have so
much snow that there is already talk of spring floods and delayed plantings. A
bit early for that kind of worry, but it’s out there.

China wants to keep
repeating their drought woes in key winter wheat regions even though they, too,
are still in the dormancy phase and wheat was in good condition before winter
set in. They did get some snow over the week across the dry area, and China did
finally acknowledge that it is usually dry this time of year anyway, and with
80% of the wheat irrigated chances are still high they will have a good crop.

Speaking of good crops,
India issued their latest wheat production estimate at 81.4 MMT, .7 MMT higher
than USDA. If realized, it would be India’s 5th record crop in a row! The
question is where will they put it? In their stocks report also released this
week, India estimated current wheat stocks at 19.4 MMT, significantly higher than
their target of 8.2 MMT. Rice had a similar report, with current stocks at 27.8
MMT, compared to their target of 11.8 MMT. They do appear to be competitive in
the export market at least to their neighbors as they managed to sell some
cargos of both wheat and rice to Bangladesh.

USDA issued their
supply/demand report on Wednesday. The trade was looking for bullish numbers
and they got more than they expected with corn. An increase in ethanol use took
corn ending stocks down to 675 million bushels, and stocks to use ratio down to
5.0%, the lowest ratio since ‘95/96. Corn prices shot higher and pulled wheat
and soybeans higher as well, even though the stats for both of those crops were
virtually unchanged. It would seem to me that as long as corn stays strong, it
will certainly add major support to wheat as well, particularly considering the
large quantities of feed wheat available.

There was plenty of
uncertainty surrounding the Egyptian political situation during the week with
wheat being understandably nervous about a new government’s ability to stay
consistent with wheat purchases and/or shipments. By the end of the week,
however, even with the certainty that a new government would indeed be formed,
Egypt at least showed a sign of stability with a late-week purchase of 170,000
of US, Canadian and Australian wheat.

The media attention being
given to the food situation is nothing short of astonishing. Even in 2008 when
grain shortages were more acute, it didn’t get this much coverage. It certainly
can make one wonder about the old adage, when the major headlines are talking
about grain prices, the top is near. There aren’t any definitive signs of a top
yet, but the constant reporting about food inflation, tight grain supplies, the
battle for acres, and even the assumption by some that China will have to
import wheat because of drought in February is really making me nervous.

As many countries scramble
to secure enough food supplies by buying whatever wheat they can afford, there
are also continuing issues with the customers who typically want higher quality
wheat and can afford it, but can’t find enough of it.  Japan is one such customer. Long known for insisting on high
protein milling wheat, they made the unusual move this week of lowering the protein
requirement for imports. Going from 13.5% to 13.0% protein levels certainly
will make securing supplies easier for them, and make it much easier for both
the US and Canada to supply their tenders.

With domestic mills lowering
their requirements of the last several weeks and now some finicky importers
down to 13.0% pro for spring wheat, it potentially makes the Minneapolis Grain
Exchange a much bigger player in the hedging arena. While the specs for
delivery on the MGE are 13.5%, you can still deliver 13.0% on the contract with
a minor discount. While it may not matter much in the end if enough 13’s are
around to supply the needs, it does make for some interesting potential
squeezes as we get into the expirations of the March and May contracts.

So here we are, in
mid-February with no sign of the February Break yet. On the contrary, we saw
new contract highs this week with no signs of a topping formation. Cash markets
continue to stay strong as basis keeps creeping higher. It would stand to
reason that as long as basis stays strong, the futures will be well supported
as well. I think that will be the key moving forward; when basis begins to get
sloppy, look out for an impending top. I think we also need to remember recent
history as well; the top at the all-time high in 2008 came on February 27,
which is just around the corner.

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