June 9, 2008

Strong Rally Despite Harvest

The wheat complex caught a big updraft last week on weather, the strength of corn and crude oil, and on the weakness of the US dollar. Even as harvest moves into high gear in the southern plains with yields 20-30% higher than expected, long lines at elevators and basis plunging, wheat futures rallied some 80 cents as weather continues to wreak havoc on the corn and bean crops.

Relentless rains and increasing flooding across much of the Midwest have caused extensive planting delays in corn and beans; and now it looks as though several million corn acres that needed to be planted or replanted will not get done. In fact, producers will be deciding whether to plant those acres at all or choose to take the preventive planting insurance payment.

The weather has been key for corn and bean prices, sending corn into new all-time highs and new-crop beans back up to their contract highs. Their price rally has been very influential in pulling wheat higher as well, along with spread liquidation and short covering. Wheat has also found some limited support from concerns that disease could become a problem in the Midwest wheat due to the excessive moisture.

Where rains are welcome is in the northern plains, which is experiencing very good moisture across much of MT and North Dakota. Winter wheat there has been brought back from the brink of disaster and spring wheat is off to a generally good start – not as good as last year but still quite good nonetheless.

Harvest here in the US is in full swing, but not really firing on all pistons. A slow start from rain delays had cash buyers scrambling early in the harvest season, but now bids are almost non-existent as the wheat pours in. Even exports have slowed significantly as buyers wait for the huge world crop to come to market. Basis in the southern plains has plummeted, particularly as the futures have rallied, as elevators become plugged and rail cars are hard to find. Rains are still creating delays and headaches, not to mention severe storms across wide regions creating extensive damage. This harvest is still early but has already had its share of difficulties, not the least of which is sky high fuel costs.

USDA will release their monthly supply/demand estimates on Tuesday. They could make plenty of adjustments but will likely keep them small at this point. Most eyes will be on yield estimates for wheat, corn and beans. They will most likely not make acreage adjustments just yet. Exports will also likely see some adjustments.

Taking a look around the world, China is projecting an increase of another 5 MMT of both wheat and corn production for this year. To date, their weather has been almost ideal for most growing areas. This would take corn production to 154 MMT, a new record; and take wheat production to 112.5 MMT, their second largest. USDA currently has them pegged to produce 109 MMT of wheat, and 150 MMT of corn. China also raised last year’s production for wheat another 3 MMT to 109, compared to USDA’s last estimate of 106 MMT.

Australia is finally getting much needed rains in their eastern areas and farmers are expected to wrap up wheat planting quickly. Wheat will get a moisture boost in both the west and east and should be well established before it heads into dormancy. Russia experienced some frost over the weekend; it is reported that limited, light damage was done to winter wheat and no damage to spring wheat. Considering the huge crop that was forecast out of Russia, we will want to monitor that situation very closely.

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.