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Wheat quality, plantings in question

Wheat had a sharp rally early in the week but couldn’t hold the gains, and prices fell back to test the lows of the recent trading range. Field surveys of corn turned crop watchers even more bullish as they shaved yield potential to well below recent USDA estimates, which pushed corn sharply higher and pulled wheat along with it. But, a sharply lower stock market didn’t help as liquidation became the story for much of the commodity complex, and wheat fell back into its trading range. 

Wheat did find support from disappointing winter wheat harvest reports out of the northern plains, and on deteriorating spring wheat conditions there as well. Weather conditions are improving for most of the Midwest and northern plains, but the southwest is still sweltering. You know it’s hot when Texas is setting new temperature records in August.

Minneapolis faltered on the rally as the reports of poor conditions focused on concerns of vomitoxin levels in North Dakota spring wheat, which would make that wheat basically feed wheat. While poor quality spring wheat usually takes its hits from the cash discounts, if it does make its way into deliveries against the Minneapolis wheat futures contract then it would have to compete with Chicago in the feed market; and the price premium it carries to Chicago would be way too high. 

Minneapolis/Chicago spreads did recover later in the week as prices fell, but the spring wheat quality issue is unlikely to go away soon and will need to be closely watched. Usually, the quality issues get resolved in the cash markets through the premiums and discounts, but since you can deliver sub-milling quality against the futures, Minneapolis futures can at times also come under pressure from those low quality supplies being delivered. On a more bullish note, the trade generally expects that total spring wheat production will be down significantly here in the US and Canada, which would be supportive for futures.

It can get confusing trying to figure out how Minneapolis will react given the wide range of fundamentals. The bottom line is that if you have high quality spring wheat, the odds are very good that premiums will recover and discounts will get worse. Fortunately, there is huge demand for the low quality supplies from the feed market, so the downside should be limited. This would also mark the third year in a row of low production of high quality spring wheat; but that bullishness is somewhat offset by higher than usual quality hard red winters out of the southern plains. 

The typical seasonal tendency for high quality premiums are a strong rally at harvest from pent up demand as users scramble to secure supplies. The winter months usually see a lull in premiums, but I would think that they would stay relatively high. And then late spring usually sees another run as supplies would be at their tightest and users want to cover their needs to get them through until harvest. 

The wheat market is also re-focusing its attention to the southern plains, where winter wheat planting should soon be starting. However, the ongoing drought and intense heat hardly have producers in planting mode, and concerns are mounting that acres will be down considerably this fall. There is plenty of time for a couple of good rains to change that, but the forecasts aren’t calling for those, yet.

USDA will release their August supply/demand report on Thursday and traders will be holding their breath as they get the re-surveyed acres estimate and an updated yield projection for the key crops of corn, soybeans, spring wheat and durum. Trade estimates are all over the map, but most expect acres and yields to be lower than last month’s projections. This has generally been supportive for the corn market, but offsetting that bullish outlook is the increasing evidence that corn consumption continues to drop, and ending stocks could be much higher than last month’s estimate. 

We’ll also get a better idea of spring wheat and durum planted acres, which could be down sharply. In the June supply/demand report, USDA transferred 7 million bushels of wheat from old crop to new crop because that much wheat hadn’t yet been planted as of May 30, the end of the marketing year. This suggests that about that many acres were planted after June 1, and wet conditions delayed plantings well beyond that date for many areas. So the question is how many of those roughly 7 million acres did not get planted at all? This will be a very interesting report to say the least.

While the trade wrestles with domestic fundamentals, there is little question about world fundamentals. Russia is taking the export market by storm, not only regaining old market share but picking up where it left off one year ago and gaining new markets as well. They’ve captured most of the Middle East business over the last month, and this week managed to sell some milling quality wheat into Southeast Asia, who is testing the supplies for quality. 

Russia over the last few years has managed to infiltrate some very finicky markets and has proven that their milling wheat can compete with pretty much anyone. This obviously poses challenges for the US, but at least we have a feed wheat market shoring up prices here at home. But for countries like Australia, which had a huge feed wheat crop last year, it’s a huge problem as they’ve been quickly bumped by Russia in the last month. They reportedly still have about 6 MMT of feed wheat left to sell from their record 26 MMT crop, and with plantings wrapping up are looking at another near-record crop come November.

With Russia’s large crop and aggressive sales stance, it doesn’t leave much of a window for the US to grab some business this fall before the Southern Hemisphere gets in the game, assuming normal weather for the Aussie’s. 

From that perspective, it looks like wheat will struggle to regain the upward momentum it had enjoyed this spring. While the downside will likely be supported at the July lows, the upside will just as likely be limited as well. A bullish surprise in corn or poor winter wheat plantings could be enough to propel wheat into some major resistance about 80 cents higher than where we closed on Friday, but that would likely be about all it can muster in the near term.

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