January 27, 2017
Politics Becomes a Force in Grains.
Like last week, wheat started out strong but was unable to hold gains. Selling picked up as we wore through the week, with only a minor bump higher after Thursday’s impressive export sales report. Politics had as much to do with price action as fundamentals – talk of slashing trade deals and more rhetoric that threatened to spark trade wars.
There was widespread disappointment as the new administration pulled out of the Trans-Pacific Partnership and then began steps to re-negotiate NAFTA. As if that weren’t enough angst for ag markets, the spat developing with Mexico about paying for a border wall could easily morph into a trade war.
It’s hard to rally grain markets when it feels like the rug is being pulled from long term trade agreements. There is no question that ag has benefited significantly from trade agreements, particularly NAFTA, and would have benefited from TPP as well. Farmers supposedly overwhelmingly supported the new president; let’s hope this isn’t his way of thanking them.
US wheat export sales were a very large 957 TMT, more than double the high end of expectations. Most of the buying was in the quality markets of hard red winter and hard red spring. I would expect that to continue to be the case as we move closer to the end of the marketing year on May 31.
So far, sales of the major grains are outperforming the pace needed to meet USDA’s projections. Wheat is at 85%, compared to the 5-year average of 83%. Corn is at 69% compared to its average of 63%. And soybeans are running at 89% sold, compared to the average of 86%.
Egypt was in the market again this week, after making two purchases last week. They bought 410 TMT of Russian wheat from $203-$204.5 delivered; that is about $4/MT higher than last week’s prices, helping world prices move higher.
Despite the large sale, Russia is still behind the pace they expected to be by now, mostly due to slow farmer selling and weather affecting grain movement. After a record production season, this puts them in an unusual position of carrying large stocks into the spring. Their wheat plantings are expected to be higher and conditions are good so far, so it is likely that they will become much more aggressive with their sales once the weather warms and they can move grain out of shallow water ports. This would likely pressure springtime world prices, about the same time that wheat is breaking dormancy here in the US. Could make for some volatility as we move through the growing season.
Talk around the trade this week had private analysts lifting Australia’s production estimates by another 3 MMT, on top of their already record high of 33.0 MMT. That will flow directly to the export channel and bring yet more competition to an already crowded space.
While wheat struggles with its own fundamentals, the corn market is still having a strong effect on it as well. And corn is struggling to find its own way as uncertain weather in Argentina will have its greatest influence through these next few weeks (pollination) along with political undercurrents regarding the new administration’s attitude toward bio-fuels, which many feel is at best unclear and likely leans unfavorable.
It is worth mentioning, as well, that another undercurrent appears to be presenting recently. That is of inflation expectations as big spending packages are presumed to be coming out of congress soon. Those expectations are supporting a bullish attitude toward commodities in general, with most of the buying showing up on the closes in grains. Grains could certainly use a bullish story as we try to find a home for huge carryover stocks, not only here in the US, but also around the world.
Technically, wheat charts appear to have confirmed the seasonal high. While we could get a bump if corn moves higher, it would likely be short-lived, and I look for wheat to move lower into late February. Old trading range lows of around 4.15 on the March Kansas City would be the likely target, followed by the contract low at 4.00. Chicago support would be 4.25, then the contract low of 4.06. Minneapolis continues to be in its own universe, and quality will still be the story for some time yet. Downside targets would 5.45, then 5.30 on the March contract.
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