January 20, 2017
Early Rally Reverses Down.
The week started out strong for wheat – but that was as good as it got. Follow-through buying from the bullish plantings report quickly faded as reports of better than expected rains across the southern and central plains over the weekend relieved a great deal of the concern about drought and crop stress.
It was the spring wheat market of Minneapolis that saw the most volatility however, as elevators switched basis from the March contract to the May, about a month ahead of normal. The large inverse in March quickly faded with a large outside day lower on the futures.
However, the fundamentals haven’t changed. The very reason Minneapolis was so strong against the winter what markets in the first place was the very low supply of high quality milling wheat. That situation will only get tighter as we move into spring, with weather during this growing season determining the direction for new crop.
Adding another element of suspense for spring wheat was a story out this week that Canada’s farmers are looking to increase canola acres at the expense of spring wheat. Wheat has no friends?
Improving weather in Argentina, at least for now, helped to stall the corn and soybean rally, and effectively removed a layer of support for wheat. Here in the US, warmer weather is coming to the plains and most remaining snow will melt, exposing dormant plants just as the forecast calls for another cold blast in late January.
Egypt tendered twice over the past week. Over the weekend, they bought 235 TMT Romanian and Russian wheat, about $200/MT delivered. On Friday, they purchased another 60 TMT Ukraine wheat at around $201/MT delivered. US prices have risen sharply over the last month while world prices have barely budged, and our export competitiveness has dropped as a result.
Not that we’re competitive in Egypt anyway, but it does illustrate the tough export environment due to massive world stocks that don’t appear to be diminishing very quickly. Argentina’s wheat harvest is complete, with their estimates coming in around 15.0 MMT, in line with USDA. Australia’s harvest is also basically complete, with a record crop looking for a home. Both have been very active in the export market at prices discount to the US.
US export sales last week totaled 303 TMT, at the low end of expectations. Year-to-date sales are running 82% of the projection, 1% ahead of the average. That number has declined from 2% over the last several weeks and it appears that the final export number will end up very close to USDA’s estimate.
Technically, wheat markets stalled out at some key resistance levels, then turned south. Last year, the high was established the day of the plantings report; this year, we have a high two days after that report which could be shaping up to be a more significant seasonal high.
Fundamentals are generally bearish – neutral at best. After a rally like we’ve had, I think it represents a selling/hedging opportunity. The risk is a continued weather problem in Argentina that would support corn and thus wheat. With more moisture in the US plains, wheat plants should be in good shape at least to start the growing season. But for now, the seasonal tendency is for wheat – and grains in general – to move lower into late February, particularly if we’ve already had a rally into early January. The rally sometimes stretches into early February, but I’ll treat this week’s high as the seasonal high until it proves me wrong.
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