USDA released its February WASDE report with something for both bulls and bears. On the domestic balance sheet, no change in ending stocks was anticipated. But USDA trimmed the export forecast by 25 million bu. while raising food use only 5 million, for a net 20 million bu. hike in ending stocks. Bears liked that. Globally, however, the trade was looking for USDA to trim ending stocks about 400,000 metric tons; but they actually dropped 2.1 million tons thanks to higher usage estimates for China and Indonesia. I see more reason for wheat fundamentals to improve (price-wise) in the months ahead than deteriorate.
Breaking out Thursday’s new WASDE stats by class, SRW and white wheat bore the brunt of the cut in exports, with SRW sales cut by 10 million and white wheat sales by 15 million. The chart below shows a class-by-class year-to-year comparison of ending stocks relative to the 90-day supply “threshold of tightness” for sustained strength in prices. Only white wheat is there, HRS and durum tied for “second place” (in tightness) at 124-day supplies. Tight supplies are still a pipedream for producers of HRW and SRW, at 212-days and 278-day supplies respectively. Ugh!
In the ongoing tug-of-war between bulls and bears, bulls are gaining the edge. The enormous old crop supplies cited by bears are old news. Even there, market bulls can now note 2 things for “perspective” on the stocks situation that are encouraging:
- Global ending stocks, while still large, have now declined two straight months.
- China’s ending stocks alone account for 48% of global ending stocks. Yet they are not a factor in global wheat trade. Take China out of the global stats, the ending stocks worldwide drop to an 81-day supply and that’s under the 90-day “threshold of tightness.”
All of this brings me the current technical picture for new crop. There is reason to “reward” the rallies because they’ve been significant. But sales can be sparing, just enough to cover cashflow needs for a month or two and maybe just the first small sale of new crop with the hope future sales will be at higher levels. Here are CBOT and KCBT July contracts marked up with my technical observations; September for MGE:
Notice that CBOT July rose right up to long-term overhead resistance (red line where the long bear market began) and suffered a downside reversal on high volume. (A downside reversal is where you make a new high for the move but then suffer a lower close near the lows of the day.) These are especially significant when they occur on high trading volume after testing overhead resistance. KCBT had a downside reversal on high volume as well. Lines in green show critical areas of chart support that must halt any decline or market bears will have technical reason to resume selling.
Here is the September MGE chart. We didn’t quite reach initial overhead resistance, closed off the highs but NOT a downside reversal and had only modest volume. It’s a rally that should be rewarded with a modest early new crop sale, nonetheless, in my view. That’s because MGE is at an unusually strong premium to KCBT wheat and that premium has been shrinking in recent price action. Plus, my work looking at crop budgets for northern Plains crops hints a boost in spring wheat acreage this year.
Now looking ahead to the 2018-19 outlook for the U.S., there’s clear reason to suspect trouble for winter wheat production; particularly HRW. Crop condition ratings for HRW going into dormancy last fall were pitiful. Further, the drought outlook from the U.S Climate Prediction Center shows southwestern drought persisting and even spreading into Texas through April. The Palmer Drought Index (see map in today’s corn report) shows dire subsoil moisture shortages in states that happen to be important SRW wheat producing states as well.
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