Wheat Futures Take a Breather

October 30, 2020

Wheat Futures Take a Breather

After setting new highs last week, wheat futures spent much of this week in correction mode. Prices temporarily stabilized at minor support levels before pushing deeper on Friday. For the week, Kansas City Dec lost 28-cents, Minn lost 25-cents and Chicago was down 34-cents. Corn was also lower by 21-cents, and soybeans gave up 27-cents.

It was a risk off week for large traders; after seeing their long positions at an all-time high for October, profit taking was the feature on month-end position evening. The market was very overbought and due for a correction in both price and/or time, and we got both.

Fundamentals are only slightly changed over the last couple of weeks. The Black Sea region had been extremely dry during late summer and into the fall, but Ukraine has managed to get widespread soaking rains while the southern Russia region missed most of the moisture.

That said, Russian farmers are planting at a record pace despite the dryness. Winter wheat plantings there are estimated at 95% complete on 18.6 million hectares, up 4% from last year. Private analysts are projecting record winter wheat plantings in Russia. If rains come, that spells a huge crop next year.

Ukraine’s wheat supply is tight this year. After seeing more acres go to corn, only to have a dry summer and disappointing corn yield. The surprise shortfall in feed grains is pushing up feed prices and pulling wheat higher as well. Europe also experienced a short grain crop this summer and is seeing imported feed grain demand much higher than normal. Since much of its corn imports come from Ukraine, they’ve been scrambling to secure supplies, keeping prices for feed and wheat much above normal for this time of year.

With Northern Hemisphere grain production pretty much dialed in, the market turns to the Southern Hemisphere for fundamental direction. A strengthening LaNina has brought dry conditions to northern Argentina and southern Brazil. World prices for both of those row crops have steadily risen this summer/fall on massive Chinese demand and now fears of yield loss in two major producing regions. This could be a powder keg if rains do not develop soon. Obviously, wheat would tag along with a major move in corn and soybeans.

Even as US futures prices pulled back this week, European futures held steady and Russian FOB was little changed from the $255/MT of last week. Demand is strong worldwide on tightening stocks in the Northern Hemisphere, tight feed grain supplies and new fears of COVID related transportation slowdowns. Countries appear to be stocking up in case exports get tripped up again like last spring, and that is likely to support grain prices in the near term.

As we move deeper into fall, we normally see wheat move lower as the Southern Hemisphere harvest brings fresh supply to world markets. Australia is harvesting their third largest crop on record and will eagerly work to regain market share lost from three years of drought. This will likely hit the Chicago market most with their soft wheat sales. Europe’s stocks are just simply tight, and their cash markets have been higher than world prices since harvest.

For hard red winter wheat, Argentina’s crop is smaller than originally expected, but will still have ample stocks for Brazil’s market and at least 2 MMT for the broader world market. Russia is sitting on a lot of wheat, but the southern region’s farmers are not willing sellers due to the dryness.

Here in the US, we have ample stocks of most classes with soft red winter being the tightest. Basis has been consistently strong through harvest and now fall. Corn and soybeans are taking up transportation and storage capacity, making it harder to get wheat to export channels and driving up FOB prices. Nevertheless, our exports have performed very well.

Export sales this week were stellar for all the major grains. Wheat sales of 803 TMT were more than double last week, and up 54% from the 4-week average. Leading the pack was white wheat with a huge 469 TMT, of which South Korea took 195 TMT, China 60 TMT and unknown 65 TMT. Hard red spring sold 190 TMT and hard red winter 131 TMT. Year-to-date sales of 16.3 MMT are 11% ahead of last year and exactly on pace to meet USDA’s projections.

Russia sets world price, and as long as their farmers are holding tight, then we can expect world prices to stay firm. I would not expect them to let loose of their supplies until they see soaking rain, which is not in the forecast before temps get cold. Poorly established wheat becomes extra vulnerable if Russia gets one of their notoriously cold winters. Stay tuned on that one as those fundamentals won’t really matter until spring.

I expect that wheat will be caught in a range for the next few weeks, with pressure from the Southern Hemisphere harvest but support from bullish corn and soybean markets. I don’t look for those markets to drop very much until we see soaking rains in the southern Brazil/northern Argentina region.

It is possible that we are in the beginning stages of a longer term bull market in wheat. We’re likely already in one for corn and soybeans. Even with a record world wheat crop this year, stocks have tightened not only for wheat, but for feed grains, and wheat is a major feed grain in many countries. While we may get pullbacks in price, they likely will be short lived if corn and soybeans stay supported.

Louise Gartner,

Spectrum Commodities

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