Solid Start to the New Year – January 6, 2017

January 6, 2017

Solid Start to the New Year.

Wheat markets started off the year on solid footing, getting a strong rally as shorts moved to the sidelines on fears of more winter kill in the US and abroad, and also ahead of index fund re-balancing and crop reports next week.

 

Another wave of bitter cold temps is moving into the central and southern plains, and some regions are without adequate snow cover. Reports also surfaced this week about winter kill concerns in Ukraine and Russia as extreme cold moved from eastern Europe into the Black Sea region.

 

Next Thursday will see a slew of USDA reports that will no doubt create volatility in the grain markets, but particularly so for winter wheat with the early estimate for winter wheat plantings being released. The market expects another year of lower seedings, especially of hard red winter wheat.

 

Crop condition ratings for December were released this week, and showed a notable drop in conditions for hard red winter wheat country – not only from November’s rating but also from last year. The reasons given were dryness, wind and freeze damage from Texas all the way to Montana. Even though spring weather is by far the most important for winter wheat development, the mounting crop stress before dormancy set in and the continued dryness have the market apparently wanting to rebuild some weather premium.

 

Index fund re-balancing begins next week, and it has been well advertised that funds will be buying wheat and corn to bring percentages back in line with stated goals. There is little doubt that part of this week’s rally has been front running ahead of that expected buying.

 

On Thursday, USDA will release not only the winter wheat seedings report, but also the quarterly stocks report and the monthly supply/demand and production reports. A ton of data to absorb, and likely plenty of volatility to go along with it. Traders will be looking at South American production estimates for corn and soybeans, with wet weather creating some difficulties in wrapping up corn and soybean plantings in Argentina and dry weather causing stress to soybeans in northeast Brazil.

 

Argentina’s wheat harvest is reported to be 95% complete, up 10 points from last week. So far, they estimate they’ve harvested 14.2 MMT of wheat; USDA last month projected their total production at 14.4 MMT, a big jump over last year’s 11.3 MMT. Quality reports over the last few weeks show protein levels in northern regions much below normal.

 

Export sales were terrible last week – for all of the major grain markets. Wheat sales were only 183 TMT, below the low end of estimates from 200 – 500 TMT. Corn sales were also below the estimate range at 429 TMT. But soybean sales were really pathetic at only 88 TMT, needless to say also below the estimate range.

 

Marketing year-to-date sales for wheat are still running 33% ahead of last year and 2% ahead of the pace needed to meet USDA’s projections. Corn sales are running 75% ahead of last year and 5% ahead of the pace to meet projections. Soybean sales are 26% ahead of last year and are also 5% faster than the pace to meet projections.

 

While the exports sales pace is promising, as US wheat prices moved higher this week, world prices weakened somewhat. The US dollar was also slightly weaker, but it appears we’ve quickly priced ourselves out of competition. Argentina and Australia are becoming a bigger presence in the world export market as they near the ends of their large harvests (Australia’s will be a record). We’ve seen Argentina makes sales into Egypt the past month or so, and this week they also managed to sell wheat to Algeria with the lowest offer of all sellers.

 

Russian export sales have been surprisingly slow so far this year. A stronger ruble and weaker currencies of their major buyers (Egypt and Turkey), along with slow domestic farmer selling have made it difficult for them to be the aggressive sellers they are noted for this time of year. But their record supplies aren’t going away, and traders expect that they will re-emerge this spring as major sellers to make room for the new crop.

 

Technically, wheat has made an impressive run as Kansas City and Chicago both pushed back into the trading range from this fall. Minneapolis pushed into new 7-month highs. The upward momentum is strong, but we’re quickly approaching the resistance at the trading range highs for the winter wheats, and I think it will be tough to get beyond those highs.

 

Seasonally, late January/early Feb has a strong tendency to form tops in wheat. If next week’s crop or plantings reports offer some bullish data, it could offer good hedging opportunities. The world is still awash in wheat, and spring will be the next major chance for weather induced rallies. For now, look to be scale up selling wheat at the range highs or on a bullish report.

 

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