Canada Markets

North American Wheat Producers May Be Next in Line

By Cliff Jamieson , Canadian Grains Analyst
The weekly chart for January EU milling wheat futures traded on the NYSE Paris Liffe indicate an upside breakout above the resistance of its July high which led to a new contract high in recent weeks. Some market observers suggest that the current pace of EU exports is not sustainable. (DTN chart)

Over past weeks, many comments have been made suggesting that exportable supplies in many of the traditional wheat exporting nations would tighten and eventually lead world buyers to North America for their needs. In recent weeks, year-to-date Canadian exports for wheat have fallen behind the pace set in the 2011/12 crop year and the 3-year average year-to-date exports, while U.S. exports have been far below what's needed to meet USDA's annual export projections, despite lowering exports by 50 million bushels in the latest WASDE report. It's certainly easy for one to be skeptical of what's to come.

A number of factors continue to point towards North American supplies and as a result, many industry officials remain steadfast in their predictions. As both Russia and Ukraine experience a dwindling of their exportable stocks, buyers have turned to Europe. Export licenses offered by the EU, primarily from France and Germany, are at 2-year highs.

To get a feel for how this has impacted prices in Europe, I'll look at the nearby MATIF milling wheat futures which is January delivery. First of all, while December Chicago soft wheat futures peaked in late July at $9.53 1/4/bu after a sudden run up due the U.S. drought, wheat has trended lower since, with today's close at $8.41 3/4/bu, a loss of $1.11 1/2 or 11.7%. Compare this to European milling wheat markets, where contract highs were reached on Nov. 9 at EUR279.25, just 10 days ago, after breaching the summer high of EUR270 in early November. Trade has backed off slightly to EUR270.25 at today's close, with former EUR270 resistance now potentially acting as support.

The attached chart indicates the price movement of the January MATIF wheat traded on the NYSE Paris Liffe exchange. This contract cracked overhead resistance created by the summer high at EUR270 on Nov. 6 to reach new highs and has since found support at this same level. This move through resistance indicates a bullish breakout, although it is not possible to say whether an uptrend will continue or whether trade will continue to consolidate.

The price spread between European milling wheat and Chicago soft wheat has also achieved its highest premium of $36.92 U.S. dollars/mt since the summer of 2011 in nearby trade. It's interesting to note a competing wheat futures trading near contract highs while North American markets trade under pressure. While this is indicative of the pressure faced in the EU to source stocks and meet potential sales, it is also assumed that European exportable supplies will be tight by mid-winter, which will push buyers towards North America as the next link in the chain.

Many sources reported on Vince Peterson's speech to the recent U.S Wheat Associates/National Association of Wheat Growers fall meetings in Houston. Peterson is the vice president of overseas operations for the U.S. Wheat Associates. GRAINNET.com reported Peterson suggesting that while current US exports are 9% lower than last year at 14.7 mmt and less than 50% of the current 31.3 mmt target, he views the US window of opportunity to be the last 6-8 months of the crop year.

Two challenges that he sees are worth noting. The U.S. Wheat Associates global presence, consisting of 70 employees in 15 overseas offices, is funded by producer check-offs which are matched by USDA contributions. Both producer check-offs and the matching funds are made possible by the US Farm Bill, which has since expired and is pending renewal. Current fears are that future marketing efforts may be in jeopardy until this renewal takes place.

The second concern brought up by Peterson is the large volume of Canadian wheat also seeking this same window of opportunity. Canada's open market system is mentioned and he suggests there is a great deal of interest as private companies seek to make inroads to access Canadian wheat. Note that DTN Markets Editor Katie Micik also noted this optimism in her column titled Wheat Industry Optimistic on Exports.

One issue which continues to plague U.S. export channels is labor unrest at Pacific North-West grain terminals. In one action, a group of 25 unionized security personnel are set to strike on Nov. 25. Because of the affiliation between unions, it is expected that grain terminal workers will not cross the picket lines as a result, hampering grain operations. At the same time, grain terminal workers themselves, at six PNW terminals, an area which ships 25% of U.S. grain exports and links the country to key Asian markets, are also involved with high-stakes labor talks that can jeopardize operations of the terminals. Terminal owners presented their "last, best and final offer" on Friday, Nov. 16. Any disruption in service at these terminals could potentially impact Canadian export potential with our grain facilities just hours north.

This comes at a time just prior to the freeze-up of the St. Lawrence Seaway while there may also be potential disruptions to the Mississippi River traffic due to water levels.

Cliff can be reached at cliff.jamieson@telventdtn.com

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