Wheat prices back to pre-Russian rally levels

Wheat - iStock-1270570904

Howdy market watchers! 

Summer is officially here with the summer solstice marking the longest day in the northern hemisphere on Thursday. And the heat is on!  NOAA is calling for the next two weeks to see above normal temperatures for much of the US and the entire corn belt. Precipitation, however, is also expected to be above average for most of the corn belt, but near normal for the southwest and southern part of the country.  

While the impact of extreme temperatures is indeed less in the presence of moisture, it still bites.  The two major weather forecast models are in disagreement on rain chances for the eastern corn belt in the coming week.  The GFS shows a couple rain chances in the next week while the Euro model calls for a much drier forecast.  Typically, it is the western corn belt that sees most of the hot and dry concerns while this growing season it is starting out in the eastern corn belt.  Regardless, the market has no weather concerns at the present time.  

It was an awkward trading week with a mid-week holiday with markets closed on Wednesday for the newish, Juneteenth holiday.  We will have the same in a couple weeks with the July 4th holiday falling on a Thursday.  

Friday marked expiration of the July grain options, which may also have had something to do with weakness in corn and wheat markets to close out the week.  Overall, it has been a discouraging week for grains in general and wheat in particular.  

With winter wheat harvest rapidly progressing in the US that was 27 percent complete as of last Sunday versus just 22 percent expected, harvest pressure continues to dominate.  Not only is harvest progressing, but yields are also impressing to the upside in HRW as well as SRW classes.  In fact, winter wheat Good-to-Excellent conditions improved 3 percent week-on-week to 49 percent, a 6-week high.  SRW conditions are the best in 24 years.  

I suspect the downward pressure from the US harvest is just about over for the wheat market. Now, markets will turn their attention to the Black Sea situation where harvest is just getting underway.  Freeze concerns followed by drought and extreme heat in Russia drove wheat futures up $1.60 in about 40-days to the May 28th highs of $7.46 ¼ on July KC and $7.20 on July Chicago charts, have been overshadowed by US yields and fresh fund short selling.  

The KC wheat harvest price for crop insurance is now $6.47, as of Thursday and will be lower based on Friday’s move that was unavailable at the time of publishing, and is tracking until the end of June.  The more the market goes down, the more crop insurance will pay out on losses.  There are few yield losses, but revenue losses due to the price decline will be more. Stay tuned.  

With a larger US crop, the question now is how bad the Black Sea wheat crop can be to stimulate another rally and fund short covering in the wheat market.  Early reports indicate declining yields as the week has progressed from 7 MT/ha on Monday to 6.5 MT/ha by Thursday as reported by Russia’s key wheat grower Krasnodar and the Sizov Report.  Ukraine’s harvest is starting around two weeks early due to earlier hot and dry conditions, which often results in lower yields.  

This week, Russian analysts did slightly increase the country’s wheat crop from the lowest 80.5 million metric ton level, but actual yield data will have more meaning now that harvest is underway.  Interestingly, it was just last Tuesday that we saw a bounce in wheat markets on concerns that the Russian freeze could be widespread than thought and yet, here we are.  The French wheat crop is still at 62 percent Good-to-Excellent, 21 percent below last year and the lowest since 2020.  

With Russia, France and the Ukraine being major wheat exporters, lower domestic production will result in lower exportable supply on the world market.  

The US dollar broke above the prior week’s highs on Friday and is a headwind for US export competitiveness, but lower futures help somewhat to offset.  US and global inflation data has continued to slow and seems to be pointing towards a potential Fed rate cut in September.  Last week’s FOMC decision held the federal funds rate steady at 5.25-5.50 percent while other countries have made cuts in recent meetings. 

The June rebound in crude oil prices could reassert upward pressure on inflation, but that rally looks to have peaked on Friday, at least for the time being.  

US corn conditions declined slightly in this past week’s ratings to 72 percent G/E and one percent below expectations, but still the best in 6 years.  All eyes will be on the weather in the coming weeks and the month of July.  Soybean conditions in the US were also lower from the week prior and one percent below expectations, but still the best in 4 years.  

For the corn market, international weather concerns may start to add some support as well with 35 percent of China’s corn area experiencing hot and dry conditions and will need to be watched.  

Next Friday, June 28th, the USDA will release the grain stocks and planted acreage report at 11 AM CDT.  This market could sure add risk premium back to the grain markets after the recent slump. On Friday, December corn made its lowest low since late February, but still 6.5 cents off the February 26th low.  I believe $4.50 on December corn futures will be the low if we reach that from Friday’s close at $4.53 ¼.  Recent chart patterns show a head-and-shoulders formation with Friday’s low breaking below the neckline that could see some further follow through to that $4.50-level.  

November soybean futures did make a low below late February lows, but closed positive on Friday.  

July KC wheat hit $5.80 on Friday and was the outside low target we were looking to for support.  December KC came down to $6.02 ¼.  However, this wheat market has continued to make lower lows and we need to halt this trend before we can say that the low is in.  Friday’s low on Chicago wheat was $5.57 ¾ and could also be support if we can stop making new daily lows.  Chicago wheat could still see a $5.50 low with a gap above that would be filled at $6.11. Anything is possible in this environment of significant volatility and tightening international supplies.  

Over to the cattle markets, the USDA released its monthly Cattle-on-Feed report on Friday at 2 PM CDT after the market close.  After last week’s rally, the futures this week gave much of it back.  The chart gap on feeders from last Friday’s bounce was filled on Thursday as I forewarned clients, but then made new lows on Friday and closed at the low.  

While Thursday’s action was somewhat encouraging for the bulls after closing well off the lows after filling the chart gap, Friday’s action was disappointing and foreshadowed the bearish Cattle-on-Feed report that manifested.  

June 1 Cattle-on-Feed were higher than expected at 99.9 percent of last year versus just 99.0 percent expected.  May placements were surprisingly higher than expected at 104.3 percent versus 98.5 percent. May marketings were then lower than expected at 100.2 percent of last year versus 100.5 percent expected.  

It is hard to believe that there are more cattle being placed in feedlots than there were last year.  Wherever they are coming from, it continues to pull forward the air pocket of cattle that will be available for the future.  

We did start to see fed cattle cash trade pick up on Friday with highs at $188 in Texas with some $189-191s in Kansas.  Fed cattle futures held up better this week with a large chart gap below still unfilled.  With the cash trade on Friday and firmer futures, this gap could remain unfilled for the time being.  

The equity markets have continued to hold their own and perform despite intra-week volatility.  This is encouraging for the demand side of the beef market indicating a resilient consumer despite higher costs and interest rates continuing to squeeze all levels of the economy.  

All markets are going to start gearing up for the presidential election that will kick-off in earnest with the first presidential debate on June 27th.  It’s going to be a long summer.  

If you would like to sharpen your knowledge on LRP, futures and options trading, Sidwell Strategies and Sidwell Insurance are hosting training classes on July 26th at Autry Technology in Enid, OK.  Online access will also be available.  Get registration requirements, cost and sign-up by emailing trade@sidwellstrategies.com.  Sidwell Strategies is the one-stop shop to protect cattle with futures, puts, LRP or a combination of all, which is probably the best strategy overall.  

If you’re ready to trade commodity markets, give me a call at (580) 232-2272 or stop by my office to get your account set up and discuss risk management and marketing solutions to pursue your objectives.  Self-trading accounts are also available.  It is never too late to start and there is no operation too small to get a risk management and marketing plan in place.  

Wishing everyone a successful trading week!  Let us know if you'd like to join our daily market price and commentary text messages to stay informed!

Brady Sidwell is a Series 3 Licensed Commodity Futures Broker and Principal of Sidwell Strategies.  He can be reached at (580) 232-2272 or at brady@sidwellstrategies.com.  Futures and Options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer

On the date of publication, Brady Sidwell did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.