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Morning markets: The US wheat that thinks it's corn

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Some US wheat seems to think that it’s corn.

 

That is, hard red winter wheat (traded as Kansas City) has surrendered its usual premium over lower protein Chicago soft red winter wheat to open up a discount which has reached unprecedented levels.

 

Last week, the Kansas City discount reached $0.68 ¼ a bushel July basis, compared with a discount of $0.06 a bushel at the start of 2019, and a premium of $0.09 ¾ a bushel a year ago.

 

‘In good demand’

Instead, Kansas City is merging its price with that of corn.

 

Its premium over the yellow grain has fallen to some $0.10 a bushel – down from $121 ¾ a bushel entering 2019.

 

And that may well have had some impact on physical demand for the grains.

 

For some feed purposes, for instance, the higher protein Kansas City wheat will represent a bargain at these levels compared with buoyant corn.

 

“This tight spread between corn and Kansas City wheat leads us to believe feed wheat is in good demand across the southern Great Plains,” said Terry Reilly at Futures International.

 

“We think feed demand for corn was sluggish over the past month and will remain that way through this summer.”

 

Big data day

This issue may rise in profile over the next week.

 

Sure, grain investors’ focus next Friday will be on the US Department of Agriculture’s Acreage report, to get a better gauge on how much 2019 production potential may have been lost to the wet weather which has forced farmers to abandon considerable area.

 

However, the USDA will also release quarterly data on US grain stocks, which will give an insight into the demand side of the balance sheet too, and is a data series which has a history of causing big price swings in its own right.

 

Price impact

While there are weekly statistics on many demand sources, eg US ethanol production, and crop exports, some sources go unmonitored in this way - notably the huge amount of grain that goes into livestock feed.

 

Quarterly stocks data give an insight into this, in showing how much of a grain has disappeared over the previous three months – with implications of course for important year-end inventory figures, and thus on price potential.

 

(More use = lower stocks, and vice versa.)

 

Futures International forecasts US feed demand in 2018-19 at 5.10bn bushels, 200m bushels below the current USDA estimate, and expected later on Friday to upgrade its estimate for feed consumption of hard red winter wheat.

 

Price divergence

Still, in early trade on Friday, the focus remained more on US weather, and the prospect for further wetness, before improved weather sets in later next week.

 

Not that this remains the whole story by any means, with soybeans – which are still being seeded, and so particularly vulnerable to wetness – easing by 0.3% to $9.12 ¾ a bushel for July as of 10:15 UK time (04:15 Chicago time).

 

By contrast, corn for July gained 0.6% to $4.52 ¾ a bushel, making up ground on the December lot, as it did during last week’s rally.

 

The new crop December corn contract added 0.3% to $4.62 ½ a bushel.

 

‘Technical support’

This looked like a continuation of the last session’s performance, when Karl Setzer at AgriVisor noted that “support from fund buying at technical support”.

 

“The market continues to teeter on being overbought though,” a factor limiting buying interest, he said, although underlining that “trade also remains aware of the fact that production is questionable this year for both corn and soybeans”.

 

In fact, corn futures are showing “exactly the chart action one would expect in a bullish market,” said Mike Mawdlsey at First Choice Commodities, focusing in particular on the December lot, and its failure in the last two sessions to hold below $4.50 a bushel.

 

“A couple days down, support holds, and close higher. So far so good.

 

“Uptrend held, close back over the old high of $4.54 a bushel, thus upside targets possible,” with these stretching to above $5.00 a bushel.

 

However, he added that “with month-end coming up, we could see more two-sided trade.”

 

Wheat gains

As for wheat, Kansas City hard red winter wheat for September, the best-traded contract, added 0.5% to $4.73 a bushel – helped higher by corn.

 

It outperformed the September Chicago soft red winter wheat lot, which gained 0.2% to $5.33 a bushel.

 

There remain some negative forces on wheat prices from the ongoing northern hemisphere harvest, and rising supplies.

 

ADM Investor Services noted “slow US weekly export sales” last week, and “talk of early US hard and soft red winter wheat yield better than expected and talk Mexico may have bought cheaper Russia wheat for import”.

 

‘Poor US export data’

Still, from a demand perspective, it was cotton which rang most alarm bells in the last session, with some poor old crop US export sales data, showing net cancellations of 119,000 running bales of upland cotton, and a dip in actual shipments too.

 

New York July cotton futures fell limit down at one point, to set a three-year low for a spot contract.

 

“The fall comes after a week of seemingly reluctant rallying,” said Tobin Gorey at Commonwealth Bank of Australia, noting “poor US export data” as behind the decline.

 

Louis Rose at Rose Commodity Group also flagged, on a negative note, some on-call data overnight, showing mill commitments “against all active contracts were off for the week ending June 14 versus the previous assay period.

 

“Producer commitments against all contracts were higher.

 

“At this time on-call data do not provide much fodder for bulls.”

 

‘Back in the lower regions’

However, July futures rebounded 0.6% to 63.59 cents a pound in early deals on Friday, when the better-traded December contract stood up 0.5% at 66.29 cents a pound.

 

Tobin Gorey noted that the December lot “is now back in the lower regions of its recent trading range”.

 

This factor could give some support – until the case that the lower end of the trading range is breached.

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