The March USDA Report was always going to remind the market that US wheat exports are dragging the chain, and that global wheat supplies are still burdensome, and that is exactly what it did.
The wheat market has had a good rally since the end of January in two phases, firstly during February, and then again since the beginning of March. The rally has been driven by fund buying on the back of drought in parts of the US winter wheat areas, and the so called Beast from the East, which brought blizzard conditions across Russia, the Black Sea region and Europe.
The weather is now getting to be stale news. The drought in the US is not changing much but what we have is already priced into the market. In Europe and the Black Sea the cold weather has come and gone, with some speculation about whether any damage was done or not.
Either way, the market will need a fresh round of concerns to re-establish the momentum to the upside. In the meantime, it is acknowledged that US wheat has been left over priced relative to wheat from other origins.
Coming out of the USDA Report, wheat futures rose a little in terms of daily closing values, but behind that, a lower high and a lower low was set for the day’s trade. Support came from corn, where the USDA Report was somewhat bullish for US exports and stock levels.
As soon as profit taking came into the corn market to end the week, wheat values were pushed lower, breaking previous support levels. The market looks set to unravel a little more of the price spike this week, but the market will be reluctant to collapse too rapidly against the drought in parts of Kansas and Oklahoma.
What the USDA Report showed us was that US exports are under more pressure because of the recent rally in prices, translating into higher US ending stocks.
On the global front wheat ending stock estimates were also raised, up 2.8 million tonnes mainly on higher production estimates for Kazakhstan, and from reduced consumption in India against rising prices.
Behind the scenes, exports were raised another 1.5mt for Russia, and reduced for the EU by 1mt. Basically, the lift in Russian exports accounts for the drop in US and EU exports.
So, the rally in US wheat futures is hitting a headwind in the short term. The rally was consolidating ahead of the USDA data, and it will now be interesting to see how far the market falls before price support is established. What we do know is that if rains are forecast for the dry parts of the US, prices will fall sharply. If it remains dry a level of price support will be found, and the rally will re-establish.
Longer term we will need to see if the US crop can come in smaller than last year’s 47.37mt. That was a small crop, driven down by the spring wheat drought. Will the drought in Hard Red Winter wheat areas take over this year and keep their crop down to a similar level?
The next question is whether Russia and repeat its record crop from last year. Some forecasts are saying that this could be a possibility after a mild winter, despite a tough planting period late last year.