Wheat Soars as World Supplies Decline

January 15, 2021

Wheat Soars as World Supplies Decline

Wow! What a week! The bull markets across the grain space are in full force with seemingly little to stop them. The fundamental outlook for wheat got much more bullish this week with yet another Russian export tax, and the weather situation in South America continues to stress corn and soybeans.

For the week, Kansas City wheat led the way higher with a 44-cent surge, Minneapolis was up 35 cents and Chicago rallied 33 cents. Corn was up 35, and soybeans were up 41 cents.

The spread between Kansas City and Chicago gained 11 cents on the front month March but gained 17 cents on the new crop July contracts. Since the early August low, the new crop July spread has gained 62 cents and is close to regaining its premium over Chicago as it currently sits just 12 cents under. It’s happening faster than I expected but the likelihood of a worldwide shortage of hard red winter wheat for old crop and now fears of that stretching into new crop is providing a huge base of support for Kansas City futures.

The grain complex has been in a major demand driven bull market for months, and drought conditions in South America are fanning those flames for corn and soybeans. Wheat, however, has its own bullish fundamentals that are also being fanned by the bullish row crops. Short crops in Europe, Ukraine and Argentina have kept the pressure largely off wheat prices this fall/winter.

Russia had record wheat production year summer, but the southern region experienced a short crop. That was really what set the dominoes tipping, as Russian exporters had to reach far inland to originate exportable supplies, pushing domestic prices for wheat, flour, feed to record highs. Their government stepped in last month with a 25 euro/MT tax starting on Feb 15. That effectively shut down offers from Russia and allowed world prices to rally up about that amount, quickly bringing prices close to Russian levels.

Yet food and feed prices persisted at elevated levels, so the Russian government this week announced another export tariff. They will keep the Feb 15 start for the 25 euro/MT but increase the wheat tax to 50 euros/MT staring March 1 and maintaining it through the market-year end on June 30. They also hinted they would keep some level of export tax on wheat into the new marketing year. In addition, they will tax corn 25 euros/MT and barley 10 euros/MT starting March 1.

Wheat prices reacted understandably bullish on the news, pushing to a 6 ½-year high, but had trouble holding the gains. So, twice in one week, we saw wheat surge higher only to see if deflate by the end of the session. They did the same thing following the crop reports. Still, there were solid gains on the week.

We had a significant amount of data dumped on the market with the monthly supply demand report, quarterly stocks report, and the winter wheat plantings all released on Tuesday. For wheat, USDA increased domestic feed use by 25 million bushels and seed use by 1 million, taking ending stocks down 26 million to 836 million bushels. World end stocks were lowered 3 MMT to 313 MT.

Winter wheat plantings at 32 million acres were up 1.58 million over last year. Hard red winter plantings led the way higher with 938,000 more acres than last year; soft red acreage was up 666,000 and white wheat was lower by 9,000 acres.

December 1 quarterly wheat stocks of 1.674 billion bushels were down 167 million from last year. Corn stocks of 11.322 billion bushels were about equal to last year but a huge 630 million lower than the average estimate. Soybean stocks of 2.933 billion bushels were down a whopping 319 million from last year.

The biggest surprise in the reports, however, was for corn. USDA took yield down another 3.3 bu/acre to 172.0 bu/acre. That lowered production to 14.182 billion bushels, down 290 million from last month. Domestic use and exports were lowered a total of 350 million, so end stocks were only down 150 million to 1.552 billion bushels. Soybean end stocks were down 35 million to 140 million bushels.

Corn shot higher and quickly locked limit up, pulling soybeans and wheat strongly higher as well. Both crops’ end stocks are very tight, and now with declining yields in South America we’re seeing demand shift back to the US.

The bullish fundamentals for all three major grains were strongly reinforced by the reports, and they are not likely to change any time soon. With demand remaining stellar and a short crop coming from the Southern Hemisphere, it looks like prices will stay elevated until we are assured of good production in the Northern Hemisphere – which of course is still months away. It also sets the stage for an epic acreage battle this spring, not only between corn and soybeans but no doubt spring wheat will find itself losing ground in the northern plains unless it keeps up with the row crop price action.

This week, Egypt tendered for the first time in a month but cancelled after getting sticker shock on a $30/MT jump in FOB offers. The market didn’t relent and just kept going up. US offers were competitive and Russia was way above everyone else.

About the only bearish aspect this week were export sales, which came in at just 232 TMT. That’s two weeks in a row of low sales, but I don’t think it will last long, as options are quickly declining to just the US and Canada.

Technically, the strong bull market looks intact. The weakness we saw on Friday could suggest a correction is due, but my guess is Chicago March should hold the $6.30-6.35 level and Kansas City and Minneapolis March should both find support at the $6.15 level. While corn and soybeans have already had huge rallies, there still isn’t a sign of the parabolic moves that would likely signal the end of the rally. Corn has stalled near the $5.50 long term resistance but hasn’t run into major selling. At some point, we’ll run out of steam on this stage of the bull market, but it doesn’t appear to have happened yet.

Louise Gartner,

Spectrum Commodities

Listen to the daily podcast on wheat and cattle:  http://spectrumcommodities.podbean.com/

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