Wheat Pulls Lower, Finds Support

May 1, 2020

Wheat Pulls Lower, Finds Support

Wheat started the week with more selling, pushing Minneapolis into new contract lows. On Thursday, the wheat complex had a strong reversal up, with Minneapolis forming a key reversal and Kansas City with an outside day higher.

Both winter wheat markets of Chicago and Kansas City bounced off support levels, giving more energy to the reversals. The market was getting oversold and as the month wrapped up, traders were eager to book profits.

Fundamentally, the market is being pressured by an important rain event moving across Europe that is also expected to bring relief to parched fields in Ukraine and Russia. For the Black Sea, the rains are critical to slow yield declines that are already occurring in Ukraine and are suspected so in Russia.

This week, Ukraine reduced expected wheat production for this year by 2.2 MMT from last month’s estimate, taking it down to 24.5 MMT. If realized, it would be a decline from last year of 4.6 MMT (16%).

The International Grains Council lowered world wheat production this week by 4 MMT to 764 MMT, which would be roughly equal to last year.

Here in the US, wheat conditions declined for the second week in a row, reflecting the freeze damage from mid-April. Dry conditions are also settling in across the western central plains, with drought expanding from eastern CO into western Kansas and surrounding regions. The short-term forecast calls for more high heat and dryness for the next 2-3 weeks, which would clearly add to the already stressed crop.

Soft red wheat, however, has seen little stress and is on track for at least average yields. With expanded acreage and good growing conditions, it looks as though soft red will see a strong harvest, a far cry from last year’s disaster.

The differing fundamentals between the two types of wheat is having a significant effect on the spread relationship between them. For the last two years, Kansas City has declined against Chicago, and for the least year has been discount to Chicago, which is highly unusual. It looks as though the market is in the process of reverting back to the norm. It will take time, but I look for KC to regain its premium over Chicago.

Export sales were a robust 623 TMT, with hard red winter and hard red spring making up most of the sales. Brazil was a major buyer as they reach outside their trade bloc where they usually buy Argentine wheat. Argentina’s exports have seen some delays recently with workers not showing up at the docks.

COVID-19 continues to wreak havoc across the entire globe, not sparing any corner or any market. Wheat, of course, is a staple in world consumption. Some countries have moved to protect domestic supplies while others have stepped in to assure consumers that there will be adequate supplies for export markets.

Russia moved to limit exports for the remainder of their marketing year, well ahead of the expected time window of mid-May. The world’s price setter has seen their domestic prices move steadily higher, causing concerns of a shortfall, particularly with the dry conditions that have settled over their major growing areas the past 6 weeks. Interestingly, their new crop offers remain well discounted to old crop and other world offers, reflecting their expectation of a large harvest this summer.

We will know soon – if the rains forecast for Russia next week are good enough, and then in a couple of months if their harvest is good enough. The market lost most of its weather premium over the past two weeks, but stressful conditions here in the US and declining yield prospects in the Black Sea should offer support in the near term.

Seasonally, wheat tends to put in a high near the May supply/demand report. This year, that report is scheduled for May 12. Unless we’ve got a sudden weather market upon us, I look to be a seller if we get a rally into that time window.

All markets are once again having to gauge the seriousness of renewed banter between the US and China as talk of tariffs re-surfaced this week. While that would be the last thing either country would need, and for that matter the world economy, it looks as though the trade war could be nearing another eruption. That would be bearish for just about all markets.

Louise Gartner,

Spectrum Commodities

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