Another Test of Lows Finds Fresh Demand – November 3, 2017

November 3, 2017

Another Test of Lows Finds Fresh Demand.

Wheat prices pushed into new lows to start November and then quickly rebounded back above those old lows. The lows first established in late August have been tested several times, each time associated with a surge in demand.

 

We see that again with this jab into new lows and subsequent bounce. Over the weekend, Saudi Arabia bought 484 TMT optional origin, with signs that much of it will come from Argentina. And, late in the week, Iraq purchased 450 TMT US hard red winter, a purchase that typically would have gone to Australia.

 

From a demand perspective, this is likely the beginning of a shift from Australia to the US for this marketing year. With Australia’s poor crop this year, we expect that they will be unable to export wheat beyond their long-term agreements. Demand will flow to other sources this winter, particularly to the US for the southeast Asian market.

 

Some of the drag on wheat prices stems from the strong rise in the US dollar, and that has pushed most of our major competitors’ currencies lower, thus making their exports cheaper. To that end, we see wheat prices in Europe, Australia and Argentina dipping lower this week. Interestingly, Russia, whose currency also declined against the US dollar, did not lower export offers this past week. They were already the lowest offer in the world and so far, haven’t had to lower prices to compete.

 

Egypt sought to clarify yet more confusion about their wheat import specifications. After rejecting some cargos for traces of poppy seeds, prompting plenty of pushback and another bump in risk premium from sellers, the government instructed their inspectors to allow for non-drug producing poppy seeds.

 

US Winter wheat plantings are all but complete with cold weather settling in across the plains. Despite Kansas planting 3 million acres in the previous week and sitting at 84% complete, they still had 1 million to go. The trade is estimating that they will not likely get planted. Oklahoma, too, had 500,000 acres left to go; also likely to go unplanted.

 

The first look at winter wheat crop conditions showed lower values than a year ago. Nationwide, 52% was in good/excellent conditions, down 6 points from last year. Montana saw the largest drop in ratings at only 22% good/excellent, down a whopping 53 points from a year ago. South Dakota was down 44 points from last year, sitting at 17% good/excellent.

 

A quick look at the Commitment of Traders report shows that large traders continue to add to their near record short position in Chicago wheat; Kansas City saw an increase in the short position while Minneapolis remains net long with little movement last week.

 

Technically, I continue to think that these lows will become long term lows, an idea supported by the quick bounce after breaking into new lows. However, the inability to sustain rallies lowers the upside targets for the trading range high. There doesn’t appear to be enough energy to sustain a move in either direction in the short term.

 

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