Wheat, soybeans run to new contract highs

By Ray Grabanski, Market Watch
Sunday, June 10, 2007 2:32 PM CDT

Wheat:

The surprise of the week has to be coming out of the wheat market. With the exception of this past week, the winter wheat crop has been steadily improving, as has the spring wheat crop. Yet Mpls and Chi pushed up to new contract highs on Friday. KC is still 24 cents from its highs, but the Chi and Mpls markets continue to put in a strong performance. What could be bullish enough to push wheat to new highs when fundamentally the crop is improving? Support has been due to concerns toward the winter wheat crop in the Southern Plains. Eastern KS and OK and much of NE have been experiencing heavy rains almost every day this week. Now harvest activity is taking place in TX and the wheat north of there is not ready to combine as of yet, but if the system does not let up soon, it could result in some crop damage due to drowned out or disease. Harvest crews were expected to get going in OK this week but with the storms they have not been able to cut.

As far as the world is concerned, watchful eyes are on the Ukraine and China as they are extremely hot and dry. Thursday talked started to surface about crop concerns in India. These countries are important because even though India and China are not significant exporters of wheat, they are huge end users. If there crops are not large enough to meet their own domestic demand, then both countries will have to begin importing. That could result in a lot of wheat needing to be exported from various regions around the globe. This brings into significance the Ukraine crop production problem, as they are the sixth man off the bench as far as exports are concerned. The Ukraine is not a reliable supplier of grain, but when they have decent production they dump the excess on the export market. It does not appear that this will be the case this year, but if we see production problems in India and China, the market will need to see contributions from all regions.

Tuesday's USDA Export Inspections report estimated last weeks wheat shipments at 13.8 MB compared to 22.4 MB last week. With one week left in the marketing year, the total year to date wheat shipments pace is estimated at 872 MB compared to 958 MB for last year at this time. USDA is estimating the 2006/2007 wheat exports sales pace at 900 MB. This would mean that the US would have to ship 28 MB for wheat during this past week to make USDA's export pace. USDA's export sales report estimated last weeks wheat exports at -9.1 MB for old crop and 35.2 MB for new crop. That puts the old crop sales for the year at 875 MB compared to last years pace of 962 for this time frame. There is one week left in wheat's marketing year, and sales are currently 25 MB behind in making USDA's pace. One would think with the dollar as low as it is (lowest in 15 to 20 year) that we should be able to be selling more wheat into the export market, but the US continues to be the supplier of last resort.

As of May 27, 80% of the nation's winter wheat crop was headed out compared to 68% last week and 77% for the five year average. TX producers have reported their winter wheat harvest to be 3% complete compared to 14% last year and 14% for the 5 year average. The winter wheat crop condition rating did decline slight, 2%, to now be rated at 57% g/e, 26% fair, and 17% p/vp. Most of the decline was due to the heavy rains that fell over the past week in KS and NE.

The spring wheat crop is all but planted and emergence is rated at 89% compared to 74% last week, and 76% for the five year average. Spring wheat crop condition rating declined slightly, 2%, slipping to 79% g/e, 17% fair, and 4% p/vp.

Corn:

Corn futures closed higher this week fueled by technicals and growing speculation surrounding this summer's weather patterns. The week started out near the bottom of a months long trading range, with spec technical buying bringing prices higher early on. Last weekend saw spotty showers move throughout the Midwest, but extended forecasts, as well as some private forecasts, have brought up the possibility of warm temperatures and little rain through Illinois, Indiana, and Ohio. While crop conditions remain impressive, this market has been and will continue to be hyper-sensitive to the possibility of any production problems. So far, that is far from the case, as crop conditions remained stable and historically high. There is a possibility of around 10 cents of upside technical potential in new crop contracts, but Pro Ag doubts we will be able to go through resistance without firmer evidence of an actual problem.

USDA crop condition reports were released on Tuesday due to the Memorial Day holiday. As of May 27, the nation's corn crop is in excellent condition and well ahead of average development. As of May 29, corn is 97% planted and 85% emerged. This is in comparison to five year averages of 93% and 75%, with last year's numbers 96% and 82%, respectively. Conditions were relatively stable with the prior week: 78% g/ex, 18% fair, and 4% p/vp. The crop lost 2% from fair into p/vp, but we also saw a 3% increase from good to excellent. The best ratings were seen in IL, IA, CO, MN, NE, and ND, all of which are over 80% in the g/ex.

Export sales this week were decent to friendly with both inspections and sales coming in better than expectations. For the week ending May 26, USDA inspected 41.29 mbu of grain for shipment, on the upper end of trade expectations for 25-45 mbu. Sales were better than expected with the same week totaling 1.37 mmt, above expectations for 800,000 to 1 mmt. Year to date sales continue to run around 7% more than the prior year.

So if conditions are so strong and acres are so high, what could be the reasoning behind the push higher? There are a few things to remember. The first is although we have moved higher, we have not done any technical damage to charts. That in and of it's self points to a more “neutral” situation. Also, remember that the market remains nervous about expanding demand and the producer's ability to meet that demand. The potential “drought” situations, whether real or perceived is a threat to that ability. The last thing is fund buying. This support has been a huge factor through last fall and will continue into this year. These funds use grain markets as a “hedge” against investment in energies and financials, and their support is crucial to maintaining these levels.

Soybeans:

Soybean futures again moved to test old highs this week with rallies continuing in soyoil and palm oil markets. The week actually got off to a fairly slow start, but dry weather forecasts for the eastern cornbelt, along with the ability of soyoil contract to post new highs enticed fresh buying into the market. Last week saw spotty showers move through areas of IL, IN and OH, but warm temperatures have persisted creating concern that we would be setting ourselves up for a drought in the coming months. Thursday saw futures test old highs at $8.45 in the November contract, but the inability to move through those levels brought prices back, actually forcing a downside reversal on the day. Traders quickly shook it off, and look prepared to make another run at it as we go into next week.

USDA released crop condition reports on Tuesday, delayed a day due to the Memorial Day holiday. While it's still a bit early to look at condition scores, crop development has moved along nicely and is ahead of average. For the week ending May 29th, USDA reports that soybeans are 80% planted at 48% emerged. This is ahead of the five year averages of 67% and 35% and last year's pace of 75% and 38%, respectively. The next week or two should see USDA start making their first estimates, and Progressive Ag would expect very good conditions in most areas.

Export numbers for the week ending May 26 were mixed with inspections poor but sales better than expected. Inspections for this week totaled 4.5 mbu, below expectations of 8-13 mbu. Sales of soybeans totaled 876,000 metric ton with old crop totaling 345,000 mt and new crop totaling 531,000 metric ton. This is a big increase over last week in old crop sales, due primarily to the efforts of Mexico and China. Year to date sales are now 23% ahead of last years at this time.

Are soybeans once again going to become the darling of the grain complex? It certainly looks like that's the case, as strong world vegetable oil markets and the possibility of a 50% drawdown of 2007 carryout stocks have attracted a fair amount of attention. Again, the friendly market here is not in the old crop months, but the loss of production in 2007 followed by strong demand and uncertain production in 2008 would leave the world short of it's oilseed needs. For this reason, the market needs to put soybeans in a position to compete against higher prices in corn and wheat. This is going to be a difficult proposition in the U.S., but could be somewhat easier in Brazil where there are less competing crops. While we are a little early to bid on acres, even in SAM, there is no doubt that grain markets have become increasingly proactive. With the ongoing support in palm and soyoil and remaining hedge fund buying interest, look for prices to break through old highs at some point this summer (maybe a weather scare going into July?).

Barley:

Producers have wrapped up the planting of barley this past week and are now starting to concentrate on spraying small grains. As of May 27, 86% of the nation's barley crop had emerged compared to 73% last week and 74% for the five year average. Barley's crop condition rating declined 2% to 79% g/e. That puts barley shipments for the year at 19.2 MB compared to 22.5 MB for last year at this time. With only one week left in barley's marketing year, USDA will fall short of their export sales pace of 25 MB.

Durum:

ND producers had 85% of their durum planted by May 27, according to USDA. That compares to 75% last week and 76% for the five year average. Sixty-eight percent of the states durum had emerged compared to 43% last week and 47% for the five year average. Two percent of the states durum was also reported to be in the jointing stage, compared to 1% last week and 1% for the five year average. Durum's crop condition rating was estimated at 90% g/e, 10% fair and 0% p/vp. USDA reported no durum shipments for last week.

Minor oilseeds:

Canola futures in Wpg closed slightly higher with most of the strength coming from spill over buying from a sharply higher US soybean complex. The main supportive factor remains to be tied to thoughts of increased demand for veg oil products to make bio fuels. As of May 27, ND producers had 98% of their canola planted compared to 94% last week and 89% for the five year average. Seventy-none percent of the crop has emerged compared to 61% last week and 58% for the five year average. ND's canola crop slipped slightly in crop condition ratings, 2%, to now be rated at 89% g/e, 10% fair, and 1% p/vp.

As of May 27 sunflower planting progress for the US was estimated at 41% complete compared to 21% for last week and 32% for the five year average. MN growers are reporting planting progress at 95% complete while ND growers are only 61% planted. This compared to 35% last week and 45% for the five year average. Nineteen percent of ND's sunflowers have emerged compared to 3% last week and 7% for the five year average.

As of May 20 sunflower planting progress for the US was estimated at 21% complete compared to 6% for last week and 13% for the five year average. MN growers are reporting planting progress at 84% complete while ND growers are only 35% planted. This compared to 10% last week and 18% for the five year average. Three percent of ND's sunflowers have emerged compared to 0 last week and 1% for the five year average. 

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