Cash Improving but Futures Soft – November 17, 2017

November 17, 2017

Cash Improving but Futures Soft.

While wheat futures markets were net lower for the week, led by Kansas City and Minneapolis, Friday’s price action was higher as surging basis in the central plains for both hard red winter and soft red offered some support.

 

As November draws to a close, the calculation period for determining storage rates under the Variable Storage Rate program for Dec through March also concludes. If the average percent of full carry is 50% or less, then the VSR will decline to 8-cents/ bushel per month, from the current 11 cents. With just four days left in the calculation period, the running average sits at 50.65%.

 

Commercials who store wheat and collect a nice 11 cents/bushel per month would like to keep their 11 cents. That incentive keeps wheat in storage and adds to the difficulty in convergence during delivery. On the flip side, end-users would like to see more wheat in the pipeline and declining incentives to store it would do just that. Both Chicago and Kansas City futures markets use the VSR system.

 

Wheat supplies within the US are generally tight, especially hard red winter after a poor production season. The cash market is awakening as basis moves higher, pulling the front month futures higher as well and helping to reduce the carry. We’ll see how much pull the end user has by the end of November, particularly since it is a holiday week when trade is normally quiet.

 

As domestic prices creep higher, world wheat prices are declining. This week, Egypt bought another 240 TMT of Russian wheat, with FOB offers $2/MT lower than last week’s purchase. Russia continues to offer wheat even as the delivery period moves into mid-winter, as recent warm weather around the ports looks to keep them open longer than usual.

 

It was interesting that Russia did not add on a risk premium to the Egyptian offer, as this week Egypt again came back to a zero tolerance for ergot in their wheat shipments. Perhaps it is becoming an old story and sellers think it will be resolved before delivery takes place. We’ll see how that turns out.

 

Not only is Russia offering sales beyond the normal time window, there is a good chance they will pick up some much-fought after business in Brazil. South America’s wheat crop looks to have lower quality than normal this year, and Brazil will need to come to the world market after they get what they can from Argentina. Russia managed to open their market to Brazil a few years ago after they showed they could supply high quality hard wheat, and that effort may well pay off this year.

 

Informa released their updated estimates for grain plantings next year. Winter wheat plantings are projected at 31.92 million acres, down 919,000 from this past year. All wheat is pegged at 45.63 million, only down 27,000 from this year. They apparently expect spring wheat acres to rebound after this year’s drought reduced plantings. Corn acres are expected to be 91.42 million, up 1.0 million over last year; and soybeans are projected at 89.63 million acres, down 600,000 from this year.

 

Technically, wheat is clearly stuck in a neutral at best, and likely slightly bearish state. Futures keep floundering at the new contract lows set just weeks ago, unable to sustain any kind of rally. With the holidays approaching, trading volume and price action tend to decline notably. Trading interest is already muted, and likely will remain so until January.

 

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