AM Markets: Hard Wheat Extends Gains on Slump in US Sowings

(Agrimoney) –  So have data showing US winter wheat sowings at their lowest since 1909 set the scene for a long-term recovery in prices of the grain?

After all, as Benson Quinn Commodities put it, “a winter wheat seeding number 2.0m acres lower than average trade estimate, and 3.75m acres less than last year, may have some longer-term implications to the wheat market – at least making a market not so attractive to be overly short in anymore”.

However, investor enthusiasm was hardly unbounded in early deals on Friday, when Chicago futures, which hedge funds do have a sizeable net short position, actually lost some ground, shedding 0.2% to $4.25 ¼ a bushel for March delivery as of 09:00 UK time (03:00 Chicago time).

‘Stocks will remain a headache’

Part of the issue was the extent of supplies there already are, with world stocks set to end 2016-17 at a record high, and US inventories ample too.

“The USDA is forecasting US 2016 inventories to be the highest in almost three decades,” said Madeleine Donlan at Commonwealth Bank of Australia.

“Those end stocks will remain a headache for the market, and likely a handbrake on prices, in the season ahead.”

And, after all, US stocks look likely to remain elevated despite the drop in winter wheat sowings, with Rabobank forecasting that US stocks will now fall by some 150m bushels over 2017-18.

That would not even be enough to reverse the 190m-bushel stockbuild, to 1.19bn bushels the US Department of Agriculture sees for this season.

Key price points

While Rabobank did see the prospect of a recovery in Chicago wheat futures in 2017, it talked in terms of “steadily improving prices, off current lows… to $4.60 a bushel in the October-to-December quarter”.

For now, one headwind for Chicago wheat was technical, with the futures seen needing to breach chart points if they are to hold a sustained rally.

Benson Quinn Commodities said that “additional fund buying is possible in Chicago with trade above the $4.30-a-bushel level”, a level which the March contract did not trouble in early deals on Friday, and baulked at in the last session too.

At RJ O’Brien, Richard Feltes said that while the winter wheat sowings data was a “short-term positive” for prices, “gains over $4.50 a bushel will be difficult to sustain without crop adversity in either the European Union or former Soviet Union”.

Growing premium

Still, there were still embers of a wheat rally smouldering in early trade, and that was in the market for higher-protein, hard red winter wheat, as traded in Kansas City, where the March contract stood 0.6% higher at $4.47 ¼ a bushel.

This represented a fresh six-month high, on a spot contract basis, besides taking the premium of Kansas City wheat to Chicago soft red winter wheat to $0.22 a bushel March basis, its highest in 10 months.

While this is more like the kind of premium Kansas City wheat might be expected to have, given its higher protein content, it has struggled in recent months thanks to its role in lifting overall US wheat stocks by a forecast 22% this season.

Hard red winter wheat stocks will soar 34% to 597m bushels, the USDA believes.

However, it is hard red winter wheat which has taken the bulk of the hit in US sowings for the 2017 harvest.

This, combined with a “shift back towards normal yields”, after last year’s bumper figures, “would result in the significant reduction of production the hard red winter wheat market needs”, Benson Quinn Commodities said.

Chicago versus Kansas City versus Minneapolis

Another question is how all this transfers to the market for Minneapolis-traded hard red spring wheat, which is higher protein still, and in which futures have already been trading relatively well, thanks to a relative shortfall in world supplies of quality wheat.

Terry Reilly at Chicago broker Futures International said: “Minneapolis, which has lost ground over Kansas City in recent sessions, has the best opportunity to remain at a hefty premium over Chicago and Kansas City – at least if demand for high protein wheat, globally, remains high.”

Still, Minneapolis wheat futures for March were in retreat in early deals, easing 0.2% to $5.72 ¾ a bushel, albeit keeping their premium over Chicago wheat close to $1.50 a bushel (a level breached temporarily in the last session, for the first time March basis).

Will the higher wheat prices spur spring sowings to offset some of the loss in winter crop area?

“Soybeans are a more profitable choice versus hard red spring wheat in the northern plains unless the Minneapolis March contract rallies closer to $6.00 a bushel,” RJ O’Brien’s Richard Feltes said.

Soybeans vs corn

In fact, prospects for US soybean sowings this year are looking pretty good all round, with the key November soybean futures: December corn futures ratio standing at 2.62, well into territory viewed as incentivising farmers to prefer the oilseed to the grain.

“Midwest states will be prime candidates for a switch to soybeans,” Mr Feltes said.

He added that a USDA crop sowings briefing due on March 31 “is shaping up as a potentially bearish report for soybeans – especially if Argentine crop issues stabilise while Brazil soy potential continues to improve”.

The USDA on Thursday upped its forecast for Brazil’s newly-started soybean harvest by 2.0m tonnes to 104.0m tonnes, citing official estimates from Brazil itself.

South American prospects

Still, it is the Argentine crop which is attracting more comment, given a mixture of too little rain, and too much, which has prevented farmers sowing all the crop they wanted too, and trashed some of what was seeded too.

“Central Argentina has been hit by another deluge of rain, worsening flood conditions,” CBA’s Madeleine Donlan said.

Benson Quinn Commodities contrasted the USDA’s decision to leave its Argentine crop estimate at 57.0m tonnes with “local and private analysts’ estimates that are in the 52m-55m tonne range”.

‘Still a lot of beans in the US’

The broker also flagged separate USDA data on Thursday, on stocks, which showed that, while soybean inventories were up 7% year on year as of the start of last month, the increase had been led by off-farm stocks.

“There are still a lot of beans in the US with December 1 stocks report large at 2.895bn bushels but over half of these bushels are already in the hands of the commercial, with the producer a more aggressive seller of his 2016 beans to date than he was in 2015,” implying relatively less selling pressure to come.

Nonetheless, soybean futures for March fell by 0.4% to $10.36 ½ a bushel in early deals.

Corn recorded losses too, although less so, at 0.3% to $3.57 ¼ a bushel for March delivery, after a somewhat tepid performance in the last session too, as traders assessed USDA data for the grain on which it was harder to build a bullish case.

In fact, the slew of statistics was broadly viewed as somewhat neutral for prices, with the benefit of a downgrade to the US 2016 harvest estimate offset by weaker expectations for feed demand.

Contrasting cotton views

Among soft commodities, cotton eased too, by 0.1% to 72.25 cents a pound in New York for March delivery, extending losses of the last session, after the USDA surprised investors by raising its forecast for domestic cotton production in 2016-17 by 435,000 bales to 17.0m bales, thanks to better-than-expected results in Texas.

Although some of the extra production was swallowed up by extra export hopes – which were supported by separate data showing a strong 236,000 running bales in US export sales of upland cotton last week – the forecast for domestic stocks was lifted by 200,000 bales to 5.0m bales.

“Investors hold a large long position in cotton which could leave the market vulnerable to some short-term liquidation,” CBA’s Madeleine Donlan said.

Still, Rabobank said it remained “constructive on prices”, saying that a “500,000-bale increase in the new crop global supply and demand deficit highlights support longer term”.