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Rebalancing could help wheat prices

Perhaps there is relief in sight for the wheat complex. After a brutal fall season and more selling through the holidays, wheat prices actually managed a pretty respectable close for the first Friday of the new year, giving us key reversals in many of the contracts.  

Earlier last week, reports of Argentina finally loading wheat destined for Brazil added another bearish element to a market that was already on the ropes. For weeks, the trade has wondered if any wheat at all would be delivered, but it appears that at least will make it. Brazil has been an active buyer of U.S. wheat over the last few weeks, but if Argentina can make at least some deliveries, then U.S. business will likely slow down for the near-term. 

Corn was also contributing to the weakness in wheat, with more Chinese cancellations not only of corn, but also DDGs.

Wheat’s overall downward trend, fueled by record world production and slightly increasing carryover, has also been enhanced by record fund liquidation as investors jump ship after years of seeing futures trading losses and stock market gains. For the next few weeks, index funds will be in rebalancing mode, which could actually be supportive to wheat and corn prices.

Cold weather is wreaking havoc across the northern half of the country. So far, it looks like winter wheat is faring pretty well, with most regions covered with at least some snow. It is worth noting, however, that the southern Plains have little to no snow cover, and temps are forecast to dip below zero next week. Just something to keep in mind as we break dormancy in two months.

Export sales were weak with only 257 TMT sold last week, well below trade estimates. Year-to-date sales are still ahead of the pace needed to meet USDA’s projections, but the pace has slowed over the last month. Typically, we see Australia step up with more sales now that their harvest is mostly complete, and they will be aggressive sellers for the next few months.

Competition is going to remain stiff, proven again by Egypt buying Black Sea and European wheat this week. But the competition will be toughest for the lower quality wheat; Minneapolis futures are showing that clearly as they moved discount to Kansas City and approach Chicago values. With the record Canadian crop that is largely lower protein, it is likely that Minneapolis will eventually move par and likely discount to Chicago for this marketing year.  

This week, the market should be back in full swing as traders should have wrapped up their holiday vacations. And that will be just in time for a slew of reports on Friday – the monthly supply/demand, quarterly stocks, and the winter wheat plantings reports will all be released at the same time during trading hours. No doubt, lots of volatility will immediately follow.

India reported last week that their winter wheat plantings would likely barely surpass last year’s record. With good conditions so far, that puts them on pace for yet another record wheat crop. They’ve managed to sell more wheat now that they lowered their floor price, and at values that are actually above that new floor price. 

The trade expects that India will remain active sellers of their low-quality wheat for the next several months. With the overabundance of lower quality wheat in the world coupled with the huge corn crop, and now China rejecting U.S. corn and DDGs, the outlook for feed grains remains pretty negative; and it will likely cast a negative shadow on wheat as well. 

With Friday’s strong showing, it could well be that wheat has finally found at least a temporary bottom and will move into a corrective mode. There isn’t much resistance above us until we get to the old double-bottom, which is a good 50 cents higher.


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