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US grain stocks data bodes well for one contract

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There was only one clear winner, in price terms, of the long-awaited US grain stocks report.

The US Department of Agriculture's quarterly grain stocks briefings have a habit of pulling surprises, causing large price movements in their wake.

And this one did its bit in prompting sharp declines in most contracts.

Only one variety - hard red winter - of one grain - wheat - escaped the sell-off among the major crops, a result which looks justified.

Not quite so tight

Investors had good reason for selling off soybeans, given the extra 16m bushels the USDA found.

OK, that hardly represents ample supplies, in lifting inventories at the close of 2012-13 to 141m bushels.

But an implied stocks-to-use ratio of 4.5%, compared with the 4.0% of consumption at which the USDA had seen inventories closing the season, does mean users can let their belts out a notch.

Furthermore, given that the extra supplies came from an upgraded estimate for the drought-hit 2012 harvest, that only raises the aura of the oilseed as a "miracle crop" – boding well for its revival from this year's dry close to summer too

More on top of ample

There looked even better cause to sell corn.

The figure for year-end stocks came in at 824m bushels, 163m bushels more than the USDA had previously pegged them at.

And this in a year of late harvest – meaning no excuse this time that stocks were swollen artificially by some new crop corn masquerading as old crop.

The best hopes for bulls that further price falls are limited is that the market is already factoring in huge supplies of the grain, to which an extra 163m bushels may not prove that much an extra burden.

Furthermore, hedge funds already have a record net short position in futures and options, on which they may want to take profits, so exerting buying pressure.

One step forward, one back

More intriguing is what the revised stocks, coupled with a separate report on small grains production, mean for wheat.

On the face of it, the data were pretty much neutral for soft red winter wheat, the type traded in Chicago.

An upbeat stocks report - showing all-wheat inventories 59m bushels lower than investors had expected – was offset by an upgrade of 23m bushels to the estimate for this year's US harvest of the soft red winter variety.

Chicago wheat might have got away with a flat close were it not for the weakness in corn, a rival in feed demand, over which soft red winter wheat already had an elevated premium.

Two ticks

But the data gave ticks in both boxes for hard red winter wheat, as traded in Kansas City. The USDA cut its estimate for the harvest of the variety by 47m bushels, and signalled a steep drop in inventories too.

While the USDA did not break out its wheat stocks data by variety, inventories in Colorado, Kansas, Nebraska, Oklahoma and Texas, the big hard red winter wheat producing states, dropped by 18% - more than the 12% drop for all varieties in all states.

Investors looked justified in lifting hard red winter wheat prices on Monday to a three-month high.

Hard vs soft

As to whether prices can stay there, hard red winter wheat has strong fundamentals - and at a time when quality wheats are in demand.

And the premium over soft red winter wheat, at 9.0%, is hardly outrageous by historical standards. At a farmgate level, hard red winter wheat prices averaged a premium of 18% over soft red winter wheat in 2007-08, the last season of such tight stocks (in fact tighter).

It wouldn't be surprising to see prices test further the limits of their premium potential over the next few weeks.

But grain markets, of course, march on two legs – supply and demand.

Some major hard wheat importers, such as Brazil, are already rumoured to be testing out alternative suppliers, such as Europe. US export data look like taking on increasing importance in pricing in the wheat market, as a guide to how much consumers are willing to pay.

By Mike Verdin

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