Traders Spread Wheat Markets

Wheat markets were mixed last week, with Chicago extending its gains against Kansas City, particularly in the front months.
According to the Commitment-of-Traders report, large traders decreased their short position in Chicago wheat, but went from net long to net short in Kansas City. They slightly decreased their net short in Minneapolis.

In general, wheat has struggled to just hold the harvest lows, with Kansas City now trading below them. Part of the bearish sentiment stems from Russia, who reported an increase in wheat production and expected exports, even though their exports normally slow down significantly during winter.

Argentina is also getting a reprieve from rain on mature wheat, allowing harvest to move forward. That said, the quality of its wheat has clearly taken a hit, with numerous reports of sprout damage. The world is depending on a good crop of milling grade wheat from Argentina. While it may have some good quality wheat to export beyond Brazil, it will certainly be less than early estimates.

So, that directs demand for high grade wheat to North America. We've had a few weeks of strong export sales but haven't been able to string together more than two in row. As we head into the winter season, competition from the Black Sea normally declines, and we don't expect Europe to have much to export.

The world usually sees a surge in exports from the Southern Hemisphere as we get into Dec/Jan, but this year will be different. We've already discussed Argentina, but Australia is in worse shape. The drought that scorched crops last year has intensified and decimated crops this year. USDA expects Australian wheat exports to be way down this year, but traders are closely monitoring the possibility that exports could be even less based on simple economics. It is cheaper for Western Australia to send wheat to their east coast than into their normal export markets, and the east coast needs large quantities of grain to feed livestock herds.

Fundamentals for wheat certainly have a bullish undertone to them, which makes it hard to explain why prices keep going down. But they are, partly because exports haven't seen the big jump needed to spark a bull rally. However, basis has improved on the lower futures, suggesting cash markets are finding better support than futures.

U.S. FOB offers out of the gulf are among the lowest in the world, but transportation costs are a limiting factor. But the world still needs milling supplies, and those are quickly dwindling for old crop.

New crop supplies are a long way off, but there are some warnings about that as well. winter wheat plantings here in the U.S. had some difficulties both for hard red winter and soft red winter. Too much rain slowed or prevented seedings, and a large amount of the acreage will enter dormancy in less than ideal condition. Both Europe and the Black Sea also experienced planting difficulties, with dry conditions forcing some late plantings. There, too, crop conditions are lower than normal as cold sets in. Obviously, one can't assume production problems with the late plantings, but it does expose the crop more than normal.

With a holiday shortened week, and a U.S./China trade meeting set for next week, the market likely will stay fairly quiet. Then we head into the normally quiet month of December. Meanwhile, the market waits for the demand to flow to the U.S..

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Louise Gartner,
Owner, Spectrum Commodities

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