July 24 – Wheat Prices Look Strong Today, but Top-Heavy

Grain markets are mostly in the green, again led by wheat prices, namely futures in Chicago, but one has to ask how long the unseasonal strength can last for.

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Wheat Prices Look Strong Today, but Top-Heavy

Grain markets are mostly in the green, again led by wheat prices, namely futures in Chicago, but one has to ask how long the unseasonal strength can last for. What’s boosting wheat prices the most is production concerns, namely more relevant dry conditions in parts of North America and Argentina, while the market has already priced in production downgrades in Europe and the Black Sea. In fact, the IGC just lowered its global wheat production estimate by 6 MMT for a total wheat harvest of 762 MMT, with the downgrade mainly attributed to Russia and the EU. Keep in mind that Australia’s harvest is looking good, with the USDA attaché there recently pegging the crop at 27 MMT. [1] This would be a 78% jump year-over-year and 1 MMT more than the UDSA’s official forecast in the July WASDE.

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As Tensions Rise, China Buys

Grain, that is. China has continued a strong pace of purchasing this week, buying 1.96 MMT of the 2.33 MMT of total U.S. corn exports sales last week. Further, they also bought 209,900 MT of 2019/20 beans and 1.49 MMT of 2020/21 new crop soybeans, or about 65% of all sales last week. Finally, they bought 127,100 MT of U.S. wheat, which is also supporting wheat prices this morning. Is this a trend, or is China buying strategically, in the sense that, at this time of year, grain prices are generally cheap?

That said, China’s grain imports in the first half of 2020 have jumped enough that more analysts believe that the state grain buying agencies for the People’s Republic will use up all their corn and wheat quotas this year, something that’s rarely done. [2] More specifically, through the first 6 months of 2020, China has imported 3.66 MMT of corn, or about 51% of its annual 7.2 MMT quota, compared to them using just 67% of said total quota in all of 2019. Furthermore, wheat imports are sitting at 3.35 MMT, 35% of its annual 9.64 MMT quota, which is already more than the one-third of the quota that Chinese wheat buyers bought in all of 2019! As a reminder, China has removed all quotas on imports of vegetable oils, including soybean oil and canola/rapeseed oil.

However, while China is buying from the U.S., relations between the two countries continue to rise with Beijing ordering the U.S. to close their consulate in Chengdu. [3] Some analysts are looking at the response as a bit timid, considering that the location is western China is more a of listening post for what’s going on in Tibet. Nonetheless, traders sold off a near-record amount of Chinese equities yesterday on the tension.

Adding fuel to the equity-selling fire yesterday was U.S. Secretary of State, Mike Pompeo, who, in prepared remarks for the press, called on its allies and the people of China to change the ways of the China Communist Party (CCP). [4] This is a pretty big step, as the U.S. government is indirectly looking to influence politics in the People’s Republic. This follows a report from the U.S. Senate that was released this week that declares “China has been exporting its digital authoritarianism and its tools and tactics across the world. [5]

It’s very clear that the barbs being traded by Washington and Beijing are accelerating in both volume and intensity, making me concerned that this pot could bubble over and we could see some sort of military conflict sooner rather than later. After all, the U.S. is conducting naval exercises in the South China Sea with Japan, the UK, and Australian navies, while China is doing the same (albeit, they have no allies to do their exercises with). [6]

Wheat Prices a Shining Light (For Now)

Wheat prices continues to be highlighted amongst analysts around the world as something to keep an eye. We know that, like barley exports in Wednesday’s Breakfast Brief, the wheat trade has seen some passing of the baton due to COVID-19 demand factors, and quota limits on wheat exports, mainly out of the Black Sea. Although restrictions on wheat exports have become less relevant as new crop supplies are coming to market, it’s likely to rear its head again some time this winter.

For me, to be honest, wheat prices are feeling a little top-heavy for this time of year. Specifically, Chicago SRW wheat prices are feeling very top heavy. As the chart below shows, in each of the last 5 years, we saw a rally sometime around late June to late July, before prices start pulling back dramatically. They don’t usually climb again until the fall and/or winter.

Chicago SRW wheat prices over the last 5.5 years

This brings to mind a saying I heard a while back, “buy puts when you can, not when you have to,” which translates to having some insurance protection to the downside before (in this case) wheat prices are tumbling down the mountain. Sidenote: there’s a great article from Total Farm Marketing about also participating in the rally to the upside, via call options. [7] Ultimately, we’re getting to the time of year where production/weather uncertainty are giving way to fundamentals. [8]

Ultimately, wheat prices are currently climbing because of some production concerns in North America now. Yesterday’s updated U.S. Drought Monitor report suggested that about 52% of North Dakota is either abnormally dry or already in moderate drought, albeit it’s mostly on the western side of the state. Southern parts of the Canadian Prairies are similarly dry, which combined with ND, are providing some support for both durum and HRS wheat prices. On the other side of the state, there’s an excessive heat warning for the eastern North Dakota & western Minnesota through the weekend (think Fargo & Grand Forks), with temperatures likely to exceed 105 degrees Fahrenheit. I’m betting there’ll be a lot of boats on the lakes.

U.S. Drought Monitor Map as of July 21, 2020

From an actual wheat exports standpoint, it helps explain why wheat prices are hanging up at the levels they are. While the U.S. 2020/21 wheat crop year just started, the Canadian 2020/21 wheat crop year won’t start until August 1. U.S. new crop wheat exports are tracking fairly well so far in the first 7 weeks, with 3.42 MMT of all types of wheat sailed, up 1.2% year-over-year.

As the weekly wheat exports chart below shows, Canadian wheat shipments have seen some of the best volumes all crop year in the last 2.5 months! Overall, I’m expecting some seasonality in wheat prices to take over soon and the downside risk appears real and wheat exports from the EU and Black Sea accelerate as more of their wheat harvest is taken off.

Canadian 2019/20 weekly non-durum wheat exports through Week 50

Have a great weekend and remember to re-apply the sun tan lotion in this heat!

To growth,

Brennan Turner
TF: 1-855-332-7653
@Combyne or @FarmLead on Twitter

At 7:40 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.343 CAD, $1 CAD = $0.7446 USD)

Sept Corn: -0.8¢ (-0.25%) at $3.273 USD or $4.395 CAD
Sept Soybeans: -0.5¢ (-0.05%) at $9.003 USD or $12.09 CAD
Sept Soybean Meal (per short ton): -$0.30 (-0.1%) to $292.80 USD or $393.23 CAD
Sept Soybean Oil (cents per lbs): +0.14¢ (+0.45%) to 30.06¢ USD or 40.37¢ CAD
Sept Oats: +2.8¢ (+0.95%) to $2.873 USD or $3.858 CAD
Sept Wheat (Chicago): +5.3¢ (+1%) to $5.348 USD or $7.182 CAD
Sept Wheat (Kansas City):+5¢ (+1.15%) at $4.463 USD or $5.993 CAD
Sept Wheat (Minneapolis): +2.8¢ (+0.55%) to $5.128 USD or $6.886 CAD
Nov Canola: +1.8¢ (+0.15%) at $11.027/bu / $486.20/MT CAD or $8.211/bu / $362.03/MT USD

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

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