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Wheat finds its legs

It was a short week, but wheat had plenty of action. Early on, prices saw continued selling pressure from the previous week but we managed to bounce and gain even more back as we wrapped up the week. Fundamentals have taken a bullish turn over the last week or so, with Russia and Australia grabbing the spotlight.

With Russia’s grain production becoming more in focus, it is obvious that they will be out of exportable supplies much sooner than initially estimated. The constant chatter among the trade that Russia will be forced to impose restrictions grew louder this week, particularly with the breakneck pace that they’ve been selling their stocks. 

Both buyers and Russian exporters are moving as fast as they can to sell whatever they can at whatever price they can before any potential restrictive move would be announced. Egypt has had three purchases in the last two weeks, buying just over 1 MMT from Russia, Romania and Ukraine. Russia sold 700,000 of that total as their domestic price shot up $15/MT, taking them very close to other offers around the world.

It is also worth noting that most of their offers were for October delivery, with only 60,000 offered for November. The trade surmised that exportable supplies from the Black Sea would be very short past October, which is about the time when Southern Hemisphere supplies would be coming available.

Ukraine exporters announced this week that they would voluntarily curb exports of all grains in early 2013. They agreed to limit wheat sales to 4 MMT, with about 40% already sold. 

But both Argentina and Australia have been dealing with weather issues that have cut into production prospects. Western Australia has been dry pretty much all season and the east is quickly becoming as much of a problem. Recent rains have helped, but have generally been light. Frost was reported in eastern Australia this week as well, with damage still being assessed; it may be harvest before we really know the extent, if any, as the crop was far enough along not to be killed but yields could be hurt. 

Production estimates for Australia are coming down quickly, with the latest sitting at 22.7 MMT (Rabobank), down 23% from last year’s record 29 MMT; USDA’s last estimate was 26 MMT. Argentina has had more than enough rain lately, as flooding across vast areas of Ag production have led some to project yield losses in those regions. 

Stats Canada released stocks estimates on Friday, reporting wheat and canola lower than trade estimates and at multi-year lows. As of July 31, wheat stocks were a 4-year low at 5.9 MMT, 200,000 less than estimated. Canola stocks were an 8-year low at 788,000 MT, about 200,000 less than estimated.

USDA will release their September supply/demand report on Wednesday, Sep 12. Most eyes will be on corn and beans, understandably. But wheat could hold some surprises as well.

It’s clear that wheat is breaking free from the grips of corn as wheat prices moved higher while corn struggled under the weight of harvest pressure and sliding cash basis levels. Seasonally, wheat tends to rally into the fall months, and I would look for the declining production from the Southern Hemisphere and the likelihood of waning Black Sea competition to help with that rally.

The chart formations also suggest that wheat is about to break free from several weeks of sideways, converging price action. I look for the contract highs to be a minimum target with the potential to go notably higher than that over the next few weeks.

I would also expect that new crop prices would be tugged higher if old crop does, indeed, have another leg up. However, the fundamentals for new crop have the potential to be much different (bearish) than current fundamentals, so be prepared to sell the new crop months more aggressively than old crop.

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