Wheat Sees More Correction

September 14, 2020

Wheat Sees More Correction

A busy week for wheat but not a lot of progress. For the week, Chicago was down 6, Kansas City down 1 and Minn down 12. A big spring wheat harvest continues to be a drag for Minn. Other than that, we see strong demand from China, rising Russian prices, strong corn and bean prices, and dryness in Argentina all supporting the wheat complex.

China has been on a buying spree – for mostly soybeans and corn, but also for some wheat. The rising tide of demand is creating a sense of optimism that hasn’t been around for a while. Some of it is catch-up from the last two years of sluggish imports from the US.

There is great deal of market chatter regarding China’s longer-term plans to stock up on food supplies so as not to get caught short-handed like they did when the US suddenly slapped tariffs on them. Stoking this concern, of course, is Trump’s clear disdain for China and the chance of him being re-elected.

There is also growing evidence that the massive flooding earlier this summer did a fair amount of damage to production, and they need to shore up supplies. Either way, the market seems convinced that China is going to be the driver of higher demand and hopefully higher prices for the next few years.

Keep in mind, however, that world wheat production this year was record large, and the production is increasing. The supply/demand report on Friday increased world production by 4.5 MMT to 770.5 MMT. But they left Russia’s production unchanged at 78.0 MMT. The Russian Ag Minister reported that the wheat harvest so far has yielded 78.8 MMT (they aren’t quite done with spring wheat harvest). SovEcon is projecting a Russian wheat crop of 83.3 MMT, up .7 from their previous estimate. It appears USDA still has some ratcheting up to do on production from the world’s largest exporter.

In addition, Southern Hemisphere production is likely improving as well. Australia is projected to produce 28.5 MMT, up 2.5 MMT from last month and their third largest on record, and recent rains will solidify that estimate. This figure is a whopping 13 MMT jump over last year.

Argentina was seeing a yield drawdown from dryness, but recent rains should at least stop the slide and stabilize production. Argentina is now looking like production will be about equal to last year at 19.5 MMT, down 1.0 from last month.

USDA also increased Canada’s production by 2 MMT to 36.0 MMT, their second largest on record.

To be sure, the world has plenty of wheat. Even with China holding about half of the world’s end stocks, much of the rest is in the hands of major exporters.

Europe is the only major exporter that had low production, and their prices have remained elevated. US prices also rallied in the last half of August. Russia has increased their FOB offers over the last few weeks as they catch up with rising world prices. Now that they are about equal, I expect we’ll see prices stabilize in a narrower range.

We’re approaching the time window of when the fall rally tends to stall. This recent pullback is likely a breather before we take another run at the late August highs. With production estimates from the Southern Hemisphere more confident (and growing), I look for those supplies to hit the world pipeline as we get into November and pull prices lower into the winter.

Louise Gartner,

Spectrum Commodities

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