World Prices Move Higher

July 17, 2020

World Prices Move Higher

Wheat caught a one-day spark mid-week on rumors of China buying US soft red winter wheat. It was enough to push Chicago past key resistance and blow out some stops on the way. KW and Minn tried to join the party but could not get enough buying interest to move beyond their resistance.

The fun didn’t last long as Chicago gave back most of its gains by the end of the week, settling just one cent higher. KW was down three and Minn down thirteen. The Chinese rumors were not confirmed, and traders questioned why they would be interested in soft red when they have more than enough low protein wheat and typically buy high pro for blending.

Nevertheless, it is low-pro wheat leading the complex higher. KW’s discount to Chicago is nearing the all time low, and spring wheat has gone discount for the three nearby contracts. It is rare for spring wheat to be lower valued than soft red winter.

The initial reason Chicago surged against the other two markets was reports of lower than expected yields in Russia and Europe. That is still the case. SovEcon and IKAR, ag analysts in Moscow, both lowered Russia’s production estimates. Early dryness in the southern region clearly hurt winter wheat yields, and recent heat and dryness in the northern region is taking a toll on spring wheat.

SovEcon lowered Russian production to 79.7 MMT, down 1.1 MMT from last month. It is still notably above USDA’s recent estimate of 76.5 MMT. We are seeing a situation similar to last year play out in southern Russia. Producers are cutting a high protein crop and are not willing to sell it at present prices that are significantly discounted to prices just two months ago. We don’t see a protein premium this year and didn’t last year, either.

It puts the Russian exporter in a tough spot. With export quotas looming in October and possible higher restrictions starting in January, they have a huge incentive to export as much as possible as soon as possible. But new crop stocks are in tight hands, and that is forcing FOB offers higher.

Egypt bought 114 TMT Russian wheat at $212/MT, up $6.50/MT from last week. That equates to about $.18/bu. If Russian FOB offers are increasing during the peak of their harvest season, it supports the notion that wheat is no longer in a bear market. This week’s price action showed how quickly wheat can woo the buyers, but it is still difficult to rally during harvest.

So, we wait. We usually get a fall rally and there is reason to expect that this year should have some energy behind it. Major exporter stocks are down from last year, and with the world’s price setter (Russia) already seeing domestic and FOB values improving, the outlook is promising over the next couple of months.

That said, we also are noting that both Argentina and Australia are on track for good yields. Recent dryness in Argentina is finding some relief and Australia has looked good from the time the planters were rolling. Their harvests will be in full swing during October, which is why fall rallies tend to stall from about mid-October into the year-end. Theoretically then, the bullish outlook has the most potential into early October.

This week’s export sales were a robust 764 TMT, the largest of this marketing year. China was the largest buyer with 134 TMT of hard red winter, and 190 TMT of spring wheat. We already knew about those purchases, but it underscores their desire for the higher quality wheats. Export sales are running 6% ahead of last year at 8.3 MMT, an encouraging stat considering that USDA is projecting total sales for this marketing year to be down 2%.

US crop conditions fell a bit from last week, with spring wheat down 3 points to 68% good/excellent. Montana slipped 3 points to 79%, still an impressive number but starting to account for early dryness and hail damage.

I look for wheat to move sideways for another couple weeks as we work our way through the Northern Hemisphere’s harvest. If corn and soybeans run into production trouble, wheat will move higher in sympathy. Longer term, I look for a fall rally that could have decent potential with a high likely in early October.

Louise Gartner,

Spectrum Commodities

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