Wheat Surges Higher

December 11, 2020

Wheat Surges Higher

In the blink of an eye, wheat went from being near a bearish trend to a significant bull trend. Monday actually set a new low for the move, breaking below trading range lows, but by Friday Kansas City wheat had set a new contract high, with Chicago close behind. Minneapolis was a slow follower. For the week, KW rallied 38 cents, settling just below the old contract high. Chicago was 40 cents higher and Minneapolis 20 cents higher. Corn was up 3 while soybeans lost 3 cents.

We had a supply/demand report on Thursday, and that offered some bullish support. USDA raised US wheat exports by 10 million bushels, and along with a drop in imports of 5 million took end stocks down 15 million bushels to 862 million bushels. While that number is generally a comfortable stocks situation, it looks like exports will continue higher than expected and stocks will likely decline as a result. World stocks were lowered 4 MMT to 316 MMT, still a record.

But by far the biggest supporting factor this week was talk of Russian export restrictions. Despite the second largest crop on record, domestic Russian grain prices have been at record highs for months. A short crop in the southern region forced exporters to originate wheat further inland to fulfill export commitments.

The record high grain prices understandably led to record high food prices. Domestic millers and livestock operators have prodded the government for weeks to slow the pace of exports, but their requests were largely ignored as the Ag Minister instead offered to pay subsidies rather than slow exports until mid-February when restrictions were set to start.

This week, we saw a complete change of attitude in Russia after President Putin basically took the side of the end-users. In the blink of an eye on Thursday, a $30/MT tax was suggested for sunoil exports; by Friday wheat was next with a proposed $30/MT tax as well, which equates to about $.80/bu. It looks like mid-Feb is still the start time, which would effectively shut down all Russian wheat exports.

It goes without saying how bullish that would be, particularly for winter wheat. Russia is the world’s largest wheat exporter, setting world price in the process. Their absence would push more sales to the US in a season where our exports are already well ahead of last year and stocks are declining. Even with Australia’s second largest crop on record working its way into world markets, the potential for the US is big. Europe and Ukraine will be smaller exporters this year due to short crops, while Canada’s large crop will keep spring wheat prices in check.

Add to that the poor condition of next year’s winter wheat crop in Russia and the US. The Russian Ag Minister this week reported that a record 22% of their winter wheat crop is in poor condition. Last year that number stood at just 6%. There is an increased chance of winter-kill as a result, and production estimates for next year are already declining with the government now projecting a 76.8 MMT wheat crop, down 7.2 MMT from this year.

Crop conditions here in the US were also much below normal as the crop headed into dormancy. Clearly, spring weather needs to be very good to avoid a major fall in world production.

US export sales were robust this week, regaining the momentum we’d seen earlier this fall. Sales of 616 TMT were well above the range of estimates from 250-550 TMT. Year-to-date sales stand at 19.3 MMT, up 13% over last year.

Wheat put in an impressive performance this week. The sharp rally will likely find some selling, but the underlying trend is higher. Wheat has found its own bullish momentum rather than just relying on corn and soybeans to pull it higher. If those crops find another leg up on poor weather in South America, wheat will have little resistance.

The fundamentals are positive longer term as we move into the next growing season. Any hint of poor weather in the Northern Hemisphere could easily take prices another leg higher. I doubt we’ll see much pressure until we get a good look at next year’s crop, which is late April/early May.

Louise Gartner,

Spectrum Commodities

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