Wheat Market Sees Choppy Price Action

August 1st, 2016

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Category: Grains, Oilseeds

Wheat, corn and soybean(Agriculture.com) – After a strong start on Monday, wheat spent the rest of the week working its way lower — eventually testing recent contract lows. Corn prices were generally sideways, and after some choppy price action, soybeans finished the week with a strong outside day higher.

The fundamentals for wheat are turning much more interesting — at least they are moving away from the relentless bearish outlook. Production losses in Europe are worse than expected with harvest results in France showing a 25% drop in yields from last year and roughly 90% failing to grade deliverable quality. This sets the stage for some potentially interesting futures market dynamics in Europe as buyers will likely just buy the board and demand delivery of milling specs. I wouldn’t want to be short that contract.

And it’s not just France running into trouble. Germany, which normally supplies the bulk of Europe’s high-grade wheat, is also seeing a disappointing harvest of low-quality wheat.
At the same time, we see that the EU export program is having trouble slowing down sales, as the first three weeks of their marketing year are continuing the strong sales program of last year. So far this marketing year, export sales are running a record pace, a rate that certainly cannot be sustained with this year’s harvest.

On the flip side, the Russian harvest just keeps getting bigger, with recent private estimates pegging the wheat crop at a whopping 69 MMT, far above last year’s record of 61 MMT and well above the USDA’s last estimate of 65 MMT. Ukraine and Romania aren’t too far behind. Good thing for France, who has already bought 55 TMT milling wheat from Romania — triple its entire last year’s purchases from Romania.

Romania is becoming a familiar name in the export market, and it was present again this week with another shared sale to Egypt, along with Russia. World prices are being set by the Black Sea region, but the European competition has disappeared, and we see world wheat prices starting to creep higher.

Those higher world prices did support U.S. prices this week, but we’re still slogging through a huge winter wheat crop and about to get into the heart of a big spring wheat harvest. Farmers are taking advantage of the loan program, which will generally serve to take wheat off the market for now. But those bushels will eventually make their way into the pipeline, likely most of it at the same time about nine months from now.

Weather is still a major factor in grain price movement, but increasingly it’s more about soybeans. The heat abated just as the bulk of corn was pollinating, but it looks like the high-pressure ridge is returning to the western Midwest for soybean pollination. Precipitation looks to be light during the next two weeks and crop stress is likely during the first half of August. So far, most of the crops across the Midwest are in excellent shape and well positioned to withstand short-lived heat and dryness. If the stressful weather extends into the second and/or third week of August, then it becomes a much different story.

Corn is on track for record yields and production, and prices have plummeted in response. However, drought conditions in Ukraine’s corn growing region are getting much more attention, and the huge U.S. export program could well get larger considering that Ukraine had become the world’s third-largest exporter. Let’s not forget that both Argentina and Brazil’s production were less than expected and neither is expected to be exporting much for the rest of this marketing year, leaving the U.S. as the major supplier of corn (and beans).

Back to wheat, it looks like the market is trying to carve out its seasonal lows, but it may end up waiting until after spring wheat harvest. Corn and wheat will continue to have a close relationship; particularly as European feed wheat looks for a home. However, both markets have limited downside risk, and the upside potential in corn should offer solid support to wheat as we work into the fall.

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