In combination with the poor demand for high-protein wheat and the ongoing trend of bearish USDA reports, the wheat markets continue to struggle to gain any upward momentum. With a higher than expected stock report at the end of September, the USDA increased the carry-in stocks by 3 million bushels. The USDA also added to the bearish outlook with a feed use decrease of roughly 30 million bushels. Cheap corn values and more than ample supplies available have been the common theme to the feed wheat demand. While some exports have recently occurred, the overall stocks are more than adequate, which is holding the wheat futures on the lower end of the trading range. Currently, the U.S. ending stocks equates to a stock surplus of 166 days. In other words, if U.S. producers did not harvest another bushel this year, we would have enough to cover almost 6 months of usage. Worldwide, there is a surplus of 132 days. With roughly three seasonal harvest periods throughout the world each year, this surplus is more than adequate and keeps the supply risk very low for the end users.
The supply concerns for DNS and durum have subsided tremendously over the past couple of months. The board spreads significantly widening out between Kansas City wheat and Minneapolis wheat last summer have led to a major demand shift to the lower-protein segment. This has resulted to some basis appreciation to the mid-protein market and some basis deterioration to the DNS market. This trend will likely continue through the next few weeks, but it is unknown at this point whether it will continue throughout the year. The export demand for DNS has moved to Canada and the Black Sea Region due to strong U.S. DNS values. Strong values also limit interest domestically for DNS. With the bulk of the row crop harvest now taking place, limited wheat supplies are expected to move over the next few weeks. This could lead to some basis volatility but should not, given the ample supplies throughout the pipeline.
Seasonally, the wheat markets tend to be negative through January. Since much of the negative action has already taken place, an environment for major rallies will be difficult to achieve. Below are the 5-year, 15-year and 30-year trends on the March Chicago futures:
Technically, the Chicago continuous charts are trying to figure themselves out. Using the Sept. 16 low – July 17 high, the WZ held the 61 percent retracement. That the market held despite the negative data shows that more fuel is needed to break that level. The key is whether corn will hold its value over the next few weeks. If additional pressure takes place in corn, it is very possible WZ will look at testing the $4.00 mark again. Likewise, technically and fundamentally, breaking through the $4.50 resistance will be difficult unless there is help from a fundamental factor.
In general, wheat is caught in a continued bearish fundamental trend. As all bullish periods end at some point, so will this bearish period, but it continues to appear that it will take additional time for this to develop. Demand will be more focused on top-quality supplies with the current market pattern and ample stock, therefore the lower-quality supplies will be the most difficult to market for the foreseeable future.