Wheat Reaches Multi-Year Highs

October 9, 2020

Wheat Reaches Multi-Year Highs

Wheat soared higher this week, reaching a 5-year high before running into selling. Dryness in the US plains and Russia’s southern region have created a weather market rarely seen this time of year. Spillover bullishness in corn and soybeans from the stocks report have drawn in huge volumes of buying from spec and index funds, stoking a bullish attitude across the grain complex. For the week, Kansas City was up 26 cents, Chicago up 20 and Minneapolis up 12.

Hints of possible rain in southern Russia showed up on the radar for October 18-22. After that, the chances diminish again so the window is small. As the calendar turns to November, it gets late to plant winter wheat in that region. Farmers have closed the bin doors as they look at parched fields, and are making decisions to either wait for rain, dust it in or plant a different crop in the spring. They have options, as strong vegetable oil and corn prices would make either sunflowers or corn workable.

Export sales were a solid 568 TMT. Year-to-date sales are running 8% higher than last year and are right on pace to meet USDA’s projections. It is impressive how US sales have managed to stay strong despite being consistently above world prices. The sudden drop in sales from Russian farmers as their fields dry up is pushing Russian FOB higher and elevating world prices, helping to stoke US sales.

Moving forward, we can expect increasing competition through the winter from the huge harvest about to begin in Australia and an average harvest from Argentina. I expect the flow of soft wheat from Australia to be a drag on Chicago futures. The flow of hard red winter wheat from Argentina would obviously affect the Kansas City futures but concerns about US great plains and southern Russia hard red winter wheat will likely provide a solid base of support for that market.

Historically, Kansas City carries a premium to Chicago (as does Minneapolis), but the last couple years of very tight soft red stocks/use has kept Chicago above Kansas City. That said, the Kansas City/Chicago spread has been improving over the last several weeks. While supplies of old crop soft red wheat are still generally tight, as we move into the new crop there is a good chance the fundamentals will reverse. With the likelihood that hard red winter plantings will be down again and a price incentive to plant more soft red acres followed by soybeans in the Midwest, the next harvest could see fundamentals quite different in the wheat complex.

The last few weeks of frenetic fund buying has propelled Chicago over Minneapolis as well, but I don’t expect that to last long. Minneapolis was finally able to hold its own against the Chicago buying around mid-week, which suggests to me that Chicago’s leadership is waning. It appears to me that we are in the process of getting back to a normal price relationship between all three wheat markets.

The supply/demand report today was largely in line with expectations, with changes stemming from the stocks report. Carry-in was lowered 16 million bushels, imports were down 5 mb (all durum), feed use was increased 10 mb, exports left unchanged and carry-out lowered 42 mb to 883 mb. World production was increased 2.5 MMT to 773 MMT (a record high). Russian production was up 5 MMT to 83 MMT, in line with most other estimates; Ukraine was down 1.5 MMT, Australia unchanged and Argentina down .5. The report was largely neutral as those adjustments were expected.

Seasonally, we are in the window for wheat to form a top. Strong post-harvest demand and tight-fisted Russian farmers are pushing world prices higher. But the Southern Hemisphere harvest looms. I think this run presents a great opportunity to book old and new crop sales. We still have record production this year and supplies are plentiful, at least for the near term.

Louise Gartner,

Spectrum Commodities

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