January 13, 2017
Low Plantings Boost Wheat.
Grain markets were focused on major reports this week – quarterly stocks, supply/demand and winter wheat plantings. Wheat markets waited for the data dump in some choppy trading, but after USDA released its slew of reports on Thursday, traders were focused on the buy side. The bullish enthusiasm carried through to Friday’s close, where Kansas City futures settled at a 5-month high, Chicago at a 2-month high, and Minneapolis at an impressive 7-month high.
The biggest reason for the push higher was the winter wheat plantings report that showed all winter wheat down 3.7 million acres from last year, a 10% decline. Hard red seedings were lower than expected at 23.3 million acres, down 3.3 million from last year and 1.6 million lower than the average trade estimate. It is the lowest acreage since 1909 and a 12% drop from last year. Soft red acres were in line with estimates at 5.68 million acres, down 400,000 from last year, a 5% drop. White wheat acres were down from 130,000 from last year, lower than estimates and a 4% decline.
The quarterly stocks reports were largely in line with estimates, with wheat stocks as of Dec 1 at 2.07 billion bushels, up 324 million from last year. Corn stocks were pegged at 12.384 billion, 1.2 billion higher than last year and soybeans were 2.89 billion, up 175 million over last year.
The supply/demand report for wheat had USDA lowering feed and residual by 35 million bushels and lowering seed usage by 8 million. Ending stocks were thus increased by 43 million to 1.186 billion bushels. World production was increased 1.4 MMT and end stocks were up 1.1 MMT. Argentina, Russia and the EU each got a production bump of .5 MMT. Argentina, Australia and the EU each saw exports up by about .5 MMT each.
The wheat complex has had an impressive rally to start the new year; index fund rebalancing got the ball rolling, and the plantings report added another round of buying. However, US supplies are still huge and world supplies are still a record. Every major exporter has abundant stocks, except perhaps Europe. Even with the continued declines in winter wheat plantings (and all wheat for that matter), US stocks continued to build with solid yields the last few years. World stocks are huge from a major increase in plantings and yields in both the Northern and Southern Hemispheres over the last few years.
Price action in wheat has obviously reflected these fundamentals as prices worked their way to 12-year lows in 2016. That said, since then prices have traded sideways to higher over the last few months, with Minneapolis the strongest performer. The tight supply of milling quality wheat is becoming more clear, particularly since it looks like Argentina won’t be able to supply much high-pro after Brazil takes their share. Minneapolis prices are soaring above the winter wheat prices, especially Chicago. Even Kansas City has finally started to move away from the drag of the Chicago market.
How far can wheat prices surge? They’ve quickly rallied to old trading range highs in the winter wheat markets, major resistance. The strong dollar and higher domestic prices is clearly pricing us out of the export market, with two weeks in a row of poor export sales. I think it will be difficult to carry wheat futures much higher in the near term.
To really change to a bullish posture, a production problem is needed – either in a major wheat producing country this spring, or a major corn producer. Argentina is looking at potential corn production issues with rains and floods hammering the northern regions, and corn prices keep bumping against major resistance but so far haven’t been able to break through.
I think that wheat prices will have trouble moving much beyond where they are now, except for Minneapolis which could well keep marching upward. The Minn and KW vs. Chicago spreads have had a strong run in the last week and are likely due for a correction. But as we head into spring, I think those spreads will continue to move higher. If wheat has a positive story this year, it is the very tight supply of milling quality, and history suggests that those values tend to peak in early May for winter wheat and early June for spring wheat.
Spring looks to hold a lot of dynamics, with the dry central plains, lower acres and milling supply squeeze potential. In the meantime, corn and beans will be slugging it out for acres. The strong soybean market is certainly supporting corn, and that market lends some of its own support to wheat as well.
For now, I look for wheat to scale back, likely heading lower into the mid-March time frame. This rally should be viewed as a hedging/selling opportunity, and those sales can always be replaced with options as the crop breaks dormancy in mid to late March.
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