New Contract Lows – December 8, 2017

December 8, 2017

New Contract Lows.

No rest for the wheat bull. This week saw another roughly 20 cents disappear from wheat futures values as all three markets forged new contract lows. Cash markets are trying to hold together with basis improving at least for higher quality wheat.


But the STATS Canada production report pulled the rug from the wheat complex. An all-wheat estimate of 29.984 MT was 1.9 MT higher than the average estimate, and 2.8 MT above September’s estimate. That was far higher than expected and all but eliminated concerns over high quality supplies here in the US. Minneapolis took the brunt of selling after the report, catching up with winter wheat’s pressure.


The one positive story line to the wheat complex this year was tight supplies of high quality wheat, and Canada just threw a wet blanket over it. That’s not to say the world is awash in high quality, just that in North America, the story lost a little luster. In the US, supplies are still tight, but it’s easy to import from Canada, and we likely will. We’ll see if USDA nods toward that in Tuesday’s supply/demand report.


Also in Tuesday’s report, USDA will likely make a downward adjustment to Australia’s production after the Australian government lowered it by another 1.3 MT from September’s estimate to 20.3 MT. Last month, USDA pegged it at 21.5 MT. The harvest progress in Australia is slow, plagued by heavy rain and winds in the southeast that very likely caused some quality damage, and possibly more yield losses as well. It has been a difficult year to say the least Down Under with drought during the growing season, and now rains on the harvest.


Argentina’s harvest is about 45% complete. We hear quality is improving as the harvest progresses, but we know they won’t have enough to supply all of Brazil’s needs. Brazil also had a higher than normal amount of low quality wheat, thus their efforts to lower import tariffs and open new markets – with Russia knocking on their door.


This week, Brazil issued a decree outlining the specifications for Russian wheat imports. It is quite possible that Russia will be able to meet those requirements, and that would be a big win for them. It would also score a win for Brazil, who want to open Russia’s markets to Brazilian beef.


As if Russia didn’t dominate world wheat trade already, they announced this week that they would be subsidizing grain transportation to export facilities by up to $34 M. They clearly do not intend to make last year’s mistake again – after a record crop last year, they were slow to get exports moving and found themselves losing out on several deals and entering this marketing year with large stockpiles. And then, as we know, they had another record crop this year. Actually, it was a monster crop, and a huge cash cow for them. So, the more they sell, the more cash they get. That said, temps are turning more seasonal in Russia with cold forecast for late December, and that will likely slow down exports.


As harvest moves into the second half in the Southern Hemisphere, here in the Northern Hemisphere the crop is quietly moving into dormancy. We don’t see any major problems with crop conditions except possibly for the US, where the southern plains are becoming drier with drought conditions appearing on the Drought Monitor. And, of course, the northern plains are still stuck in a major drought status.


While there is little correlation between fall crop conditions and final yields, and obviously water demands during winter are nil, it goes without saying that if these dry conditions continue then timely spring rains become critical. Time will tell.


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