Short-Covering in Wheat?
Jul 12, 2013
The grain markets are mixed this morning following yesterday's USDA report. The USDA issued what were seen as bearish supply and demand estimates for the new crop marketing year. New crop corn and soybean carryout estimates were well above average trade guesses. It was somewhat surprising to see the USDA cut estimates for corn demand when considering the fact that prices are lower than they were in June; demand for both feed and exports were cut by 50mil/bu. Many believe that the estimate for new-crop corn exports is far too low. The USDA left the corn and soybean acreage numbers unchanged from their June 28th report; many continue to expect an eventual reduction in corn acreage. The markets initially sold-off following the report, but were able to recover and post higher closes across the board. The reality of the situation is that current weather forecasts are far more important than any new crop S&D data at this point in the growing season. Without knowing what type of production we'll have this year, it is simply impossible predict demand estimates or carryout figures. The market realized this very quickly yesterday and rallied back on prospects of a high pressure ridge hitting the Corn Belt this weekend. The ridge will essentially lock in high temperatures and keep rain out of many areas during the 2 week period. While weather patterns could ultimately differ from this forecast, the trade may continue to add some weather premium into these new crop contracts until it has a better handle on the situation. Any drastic change in the Sunday afternoon weather outlook could cause major volatility early next week.
The one bullish surprise yesterday was the carryout projection for new crop wheat. The USDA estimated wheat carryout at 576mil/bu vs. pre-report trade guesses near 632mil/bu. Keep in mind that the wheat market has been trending lower for 8 months, and that shorts have not had a difficult time sticking with their position. Yesterday's report could be the catalyst to a much larger short-covering rally in the wheat market over the course of the next few weeks, especially if the corn and soybean markets were to move higher on weather issues. Wire services noted yesterday that China may import the most wheat in 9 years during the 13/14 marketing year. The USDA's projection for wheat exports grew sharply from their June forecast.
Today is last trading day for July grain futures. As some had predicted, both the July corn and July soybean contracts look as if they'll finish above the $7 and $16 marks, respectively. The tightness in the cash market cannot be underestimated. Many continue to wonder whether or not the September corn contract and August soybean contract will "take over" for the expiring July contracts and rally to sharply higher prices. Basis levels for both corn and soybeans will be extremely high between now and harvest without a significant rally in spot-month row crop contracts. Some believe that the September vs. December corn spread is undervalued at a 35 cent inverse. The spread itself is historically high at these levels, but has traded as high as 60 cents in other "tight supply" years. Seasonal patterns indicate that the Sept vs. Dec corn spread moves to a carry in most years between now and harvest.
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