Market Update August 2, 2017
The market will decipher corn, beans and wheat production as July has come to a close and we continue into August. Analysts are becoming less enthused about the yield prospects for corn after much of the western belt experienced limited rain and warmer temperatures during the key pollination period. Ahead of the August crop report, FC Stone lowered their estimates to 162.8 bu/acre from the current USDA estimate of 170.7. With the USDA currently projecting a comfortable 16.2 percent stocks to use, the market has had limited ability to draw in support given that the potential lowering of yields could decrease the ending stocks by as much as 661 million bushels. This decline would cause the stocks-to-use ratio to reach a much more bullish level of 11.5 percent.
In considering wheat, it is important to understand the corn dynamics as much of the lower protein HRW and SWW wheat has competed against corn in the feed markets recently. If the corn tightens up, the feed wheat markets should begin to see more life after two tough years. With the strong dollar resulting in a poor export market, the domestic feed market has been the main outlet for much of the SWW and lower protein HRW in PNW region.
Mills have loaded up on the cheap SWW supplies with the HRW harvest across the southern plains; farmers in that region are estimated to be selling 70 to 75 percent. This is a large percentage sold relative to this time of year. The DNS market led the drive upward due to the drought that hit much of the northern plains. Production is estimated to be half of last year as the market rallied over $2/bushel. Given the DNS/HRW spread that is currently $2.50/bu, many mixes are switching to cheaper HRW wheat. That coupled with a flush of old crop supplies that hit the market during the rally has oversaturated the DNS market. While the production issues are still a concern and likely will have longer-term effects to the markets, the short term appears bleak at this time.
Given current supplies, mills and feed sectors will continue to keep themselves full at lower price levels. The pipeline is expected to tighten slightly, which could yield a potential upside later in the crop year. It is currently uncertain if this could happen in 2017 or in the first or second quarter of 2018, but it appears there may be some additional excitement in store for wheat. While this is supportive, the balance sheets for wheat still show comfortable stocks and the upside may be a bit more tempered than past years, but at least it appears that we finally may have seen the end of two years of a bear market.
Seasonally, KC wheat tends to gain on Minneapolis as we get into August. Below is a chart showing that seasonal trend:
While the wheat charts are still evolving, we may be reaching a near-term bottom. So much can happen, but looking at seasonal trends, we suspect we will remain rangebound until we get through harvest.