Canada Markets

December HRS Nears a Test of Contract Lows

By Cliff Jamieson , Canadian Grains Analyst
After rallying following the Tuesday report, the December HRS weekly contract is nearing a test of the contract low at $5.32 1/2/bu. Despite the narrowing March/May spread (third study), non-commercial bearishness continues to weigh on this market. The lower study indicates a weakening premium for December spring wheat as compared to hard red winter wheat, an indicator of declining interest in high protein wheat. (DTN graphic by Nick Scalise)

New-crop wheat markets received a mixed message with this week's monthly supply and demand data released by the USDA, with bearish old-crop data released, both for the U.S. and globally. Meanwhile, winter wheat planting data in the United States indicated 7% fewer acres were seeded. This indicated a smaller crop for the 2016/17 period.

There's a good chance that there's more bearish and bullish information to come.

First of all, the bad news.

Global ending stocks for 2015/16 could grow ever further from the record 232 million metric tons reported in the Jan. 12 report. Global trader Nidera reported today that Australian wheat exports could reach six-year lows this year, between 16 and 17 mmt, as compared to the official Australian estimate of 17 mmt and the USDA's estimate of 18 mmt. The USDA also failed to reduce expected wheat exports from the U.S. in this latest report. Even though the current estimate of 21.8 mmt would be the lowest level achieved since 1971/72, both sales and shipments are currently 15% below last year's volume as opposed to the 6% reduction in volume expected by the USDA, suggesting further cuts in expected exports leading to higher ending stocks can be expected.

Also, Dow Jones reports a European analyst FranceAgriMer increased their estimate for the France carryout, with concerns focusing on stiff competition in global markets. "French farmers and co-ops are beginning to panic," suggests a trader, with milling wheat prices in Europe falling 9% over two months.

Also bearish for futures prices is the potential for further appreciation in the U.S. dollar against foreign currencies. The USDA Economic Research Service released a short study today which suggests that the U.S. dollar will continue to gain against currencies over 2016 and 2017. This conclusion was based on the expected movement of the U.S. agricultural trade-weighted exchange rate, which pits the U.S. dollar against a basket of 79 currencies based on their weighted share of U.S. ag imports. Should the current trend continue, continued pressure will be placed on commodity futures, including grain.

On the bullish side, the expected 7% drop in winter wheat plantings which includes a year-over-year drop in hard red winter wheat acres of 9%, could easily be accompanied by a drop in spring wheat plantings, which could lead to less wheat in North America. DTN Markets Editor Katie Micik has already made note of U.S. producers in northern states considering increased interest in pulses, special crops and summerfallow. This time last year, DTN's National Spring Wheat Index, an index of U.S. cash prices, was reported at $6.26/bu, almost 25% higher than the roughly $4.72/bu that will be reported on Thursday.

It may not be so clear how Canadian producers react with respect to interest in wheat, with the depreciation in the Canadian market insulating Canadian prices, with headlines suggesting the Canadian dollar could slide another 15% by the end of the year. Today's October prices for prairie CWRS, based on accessible internet bids, averaged $1.30/bu over the December future or $6.64/bu, based on today's close, with prices at some of the most favorable shipping locations nearing $7/bu.

After an 11 3/4-cent rally on the December MGEX HRS contract following Tuesday's report, Wednesday and Thursday's trade has taken back gains as prices near a test of contract lows. As seen on the attached chart, today's close is reported at $5.33 1/2/bu, just 1 cent above the Jan. 4 low.

While prices are in oversold territory, as seen in the second study, noncommercial traders remain bearish and remain in current control of the direction of this market.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

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