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Louise Gartner: Wheat breaks resistance then fails

Wow, wow, wow! Major resistance melted like a hot knife through butter as wheat futures rocketed higher on the record drought in Russia remaining as entrenched as ever. Record temperatures, hot winds and wildfires added to the decimated crops across the major growing regions of Russia, Kazakhstan and into Ukraine while the world tried to calculate what would become of the exporting capability of the world’s largest wheat exporting region.

At the beginning of the week, Russia insisted that export restrictions would not be necessary, but by Thursday Russia bowed to pressure by exporters and finally did impose an export ban from Aug 15 – Dec 31. The guesses of how much is cancelled is anywhere from 1.5 - 5 MMT now that exporters can legally declare force majeure. The market’s reaction to the announcement was to open limit up and basically stay there for the session, followed by another near-limit up move on the night session only to see futures locked limit down by the close on Friday. 

Some are suggesting that the export ban may not be needed until Dec 31, while others say it may be needed even longer. The disaster unfolding in Russia, Kazakhstan and now Ukraine isn’t just about wheat, however, it’s just as important to the feed grain market. With Russia’s barley production down significantly, wheat will be drawn into the feed rations, taking even more wheat away from exportable supplies. Asian feed grain manufacturers that buy a lot of wheat from the Black Sea region will also be looking for feed wheat supplies – and boy, do we have a lot we can sell to them. 

Not that we wish a drought on anyone, but the timing of the Black Sea weather debacle came at a pretty good time for US producers. With a large carryover of low quality wheat and another big crop coming in the northern plains of what is likely to be more low quality, the price spike came as northern plains farmers were selling last year’s crop to make room for this year’s crop. And now the likelihood of increased demand for feed wheat supporting prices for this marketing year will help out once again. 

It might take awhile for that support to get some footing considering harvest is upon us, but down the road I would expect that low-pro discounts will improve once we get past harvest. I also still expect that high protein premiums will be strong again this year because of the very short supplies of milling grade spring wheat.

This week’s futures price action topped off a 5-week breathtaking rally, which saw Chicago futures soar roughly $3.85/bu., with Kansas City and Minneapolis not far behind. Farmers were furious sellers, especially those in the northern plains trying to harvest wheat as quickly as possible to take advantage of the sharp run-up in prices. 

Funds were major buyers, shifting from a major short position to a major long position in just a couple of weeks. But there was also a notable amount of business being done as countries that thought they had wheat bought from Russia suddenly found themselves short bought and forced to re-enter the market. This was likely part of the panic buying last week that formed the top of the market.

As the market tries to get its hands around the Black Sea situation, we’re also watching the Southern Hemisphere which will start their growing season in just a few weeks. Western Australia has had a rough start to their season and need rains soon. Fortunately, forecasts call for good rains this week but more will be needed. The eastern side of Australia still looks like they’re in good shape. Argentina is seeing some late planting delays because of rains. Their acreage will be higher this year and will likely be an exporter of at least small quantities. 

What happens to prices from here is no doubt on people’s minds. It would seem to me that the futures’ top is in; price may be able to re-test those highs from Friday, but they are unlikely to stay there. Expect price action to be volatile, with strong initial support from 6.30-6.40 on both Chicago and KC Dec. The cash market should take over from here, with basis improving as the futures retrace. Once harvest is over, I would expect the basis to improve even more as it normally does into the fall. 

For producers who fixed the futures, it’s just a matter of time for the basis to get back to a more normal level to complete the cash sale. For those who haven’t fixed futures and would like to, scaling into price rallies and particularly if we re-test the highs would seem like the last chance to get those sales on the books.

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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