February 3, 2017
Wheat Bounces Back to Range Highs.
Grain markets saw a strong surge higher this week, led primarily by funds with a flush of money to start the new month. Growing sentiment that inflation is about to kick off is casting a more bullish attitude toward commodities, and funds are in the process of exiting shorts and adding to longs across many of the commodity markets, including grains.
Wheat markets also found support from nervousness over renewed tensions between Russia and Ukraine. As two of the world’s largest wheat exporters, disruptions to either of their export programs could spark a rally in world prices as buyers would have fewer options. That said, the last time they had conflict, their export programs were not affected. Russia’ s wheat exports are already lagging their expected pace, and they certainly don’t need further delays.
Russia is also closely watching a cold snap that has moved across eastern Europe and into much of western Russia, potentially stressing winter wheat that has no snow cover in their southern region – the main originating region for exports.
Weather here in the US has been generally mild across much of the southern and central plains for the last few weeks. NOAA’s longer term outlook for the month of February shows above normal temps continuing in that region and to most of the US as well.
Drought conditions continued in the plains states, according the Drought Monitor. Precip has been much below normal this winter in that region as well, so needless to say, springtime rains will be critical this year.
Crop condition ratings held mostly steady with last month, per the states that issued a report. While there is some chatter about the dry conditions in hard red winter wheat country, the bottom line is that spring rains will determine yields. We’re still a good month away from getting too concerned about moisture supplies for hard winter wheat. Soft red winter wheat is in very good shape, and most areas have ample moisture.
Quality supplies are still the primary story for the wheat complex and it is becoming more evident with each passing week. This week, Algeria bought 585 TMT of mostly European and Baltic wheat. Normally they purchase their wheat from France, but the French crop had a poor crop last year and are unable to fill their normal orders, especially for higher grade wheat. Algeria ended up buying some US wheat as a result, coming for higher grade milling and giving the Kansas City futures a boost over Chicago this week.
I still expect that particular spread to improve as we move into spring, when milling stocks will be at their tightest and producers shift their time from hauling grain to fieldwork.
US export sales last week were solid at 510 TMT, mostly coming from a combination of hard red winter and spring, a familiar allocation over the last several weeks. We also saw a cargo of new crop sold. Wheat sales are surging ahead of the pace needed to meet USDA’s projections, now standing at 87% sold, compared to the 5-year average of 84%. There is a growing possibility that USDA will increase their projections in next week’s supply/demand report, due out on Thursday, Feb 9.
Fund demand can only take the market so far, but it is clearly offering solid support on the breaks. World consumptive demand is strong as well and world wheat prices have moved slowly higher over the last few weeks, thanks largely to slow Russian farmer selling and higher domestic prices. Russian farmers’ slow sales pace could come back to haunt them with much of their record crop from last year still on hand as they approach another growing season.
Looking at the charts, wheat prices held at the first notable support level, slightly above the trading range low. The big up day on Wednesday quickly brought them back to near the range highs, where they appear to be at least taking a breather. Corn is also enjoying decent support, despite the improving weather in South America and a looming large crop beginning to be harvested in Brazil. Corn has been spending a lot of time bumping up against the key 3.70 resistance. If it can break out to the upside, the target becomes the 4.00 level. That kind of performance could easily pull wheat along with it, not to mention soybeans that will be fighting for acres this spring.
February is usually a weak month for the grain complex. If weather improves in South America like the forecasts suggest, grains would need an outside stimulus to get to that next level, but they clearly have support on the breaks and will likely continue to have support until the trade sees what is in store for the Northern Hemisphere’s growing season. For producers, adding to sales on this bounce seems prudent; if you feel another leg up is coming in the near term, replace those sales with call options.
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