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Louise Gartner: Wheat prices explode higher

Wheat put in its biggest gain for one month since 1973 during this past month of July, 2010. Traders finally became believers in the Russian drought and scrambled to exit shorts and get long the market, and in the process pushed wheat prices to new 13-month highs. 

The drought has intensified across Russia and spreading deep into Kazakhstan and into eastern Ukraine. Spring grains are all but shot across vast tracts of prime Russian growing regions, and production prospects are being slashed for virtually all of their spring planted crops. And of course, exports prospects from Russia, Kazakhstan and Ukraine are all also being slashed.

Rumors flew around the marketplace this week about Russia shutting down exports, or at least sharply curtailing them. I think it’s pretty safe to say that their exports will be down significantly, but they will do what they can to maintain their presence in the world market. The Russian government did announce that they would be releasing stocks into the domestic market, and it’s certainly possible that they will shut down exports at least temporarily to prevent those supplies from leaving the country. Ukraine did effectively shut off their wheat exports with new inspections rules this week.

The Canadian Wheat Board released their latest estimates, reducing wheat production just slightly from last month. Total wheat is estimated at 18.5 MMT, down just .5 MT from last month and 8 MMT from last year, a 30% decline. 

That paves the way for a major boost in US exports and we are in a prime position to take advantage of it. We have plentiful stocks of wheat, albeit not a lot of high quality wheat. We also have a currency that has declined against other currencies, especially the euro, making us all the more competitive. And, unlike Australia, we are a well-oiled exporting machine. Australia may plenty of bushels this coming year, but their fledgling independent grain export program has been slow to get up to speed. The announcement GrainCorp buying their rival AWB may improve that situation, but the US still will have the advantage.

Estimates of the increased export potential have reached as high as another 10 MMT, which equates to 360 million bushels. None of these numbers are in USDA’s books yet, which suggests that their latest carryout estimate of 1.09 billion bushels could realistically get shaved down to the 700 million bushel level, a much more price supportive number.

We’re already seeing the demand pick up the pace with export sales last week reported to be a whopping 920,000 MT, more than double the high end of estimates! There were many countries who buy wheat on a regular basis that had stayed on the sidelines during the initial phase of this rally, hoping that prices would stall and/or pull back. Obviously that didn’t happen, and as their stocks declined, they were forced to come into the market regardless of the higher price.

The hard red spring wheat tour took place this past week in case anyone was wondering. The trade had high expectations and weren’t disappointed. Spring wheat yields are projected at an average of 46.0, compared with 46.2 last year and expectations of 44.0. Durum was projected to average 38.4 bu/acre, compared with 36.2 last year. The northern plains are definitely on track for another bin buster crop, the more important question is ‘how will the protein fare?’

And another important question is ‘where will this rally end?’ Weather markets can be brutal and usually end with a series of extended trading range days followed by a blow-off type of price action. We’re likely in the middle of those extended trading range days, but the blow-off top is more uncertain. From a fundamental perspective, the drought can only do so much damage, which should be close to being assessed, so I would think we’re very close to the top of this rally. 

The basis has collapsed, which is normal in a weather market, especially when you’re expecting a big harvest just around the corner. Once harvest is behind us, I would look for basis to improve to a more normal range. But for now, the selling opportunities are in the futures, and we’ll have to wait for the basis to recover down the road.

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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