Wheat drops on US crop estimates

The impact of the USDA reports at the end of September that revised US crop production estimates and stock levels finally took their toll on wheat, with prices dipping far enough to breach the upward price trend that had been in place since early September. Importantly though, the shallower trend set up from late August is still intact on the December chart.
The larger than expected US spring wheat production estimate has been the main negative influence on CBOT wheat futures, but by the end of the week last week, Minneapolis futures had made a bit of a recovery, having fallen by over 40 USc/bu in two trading sessions.
This week we have the USDA’s World Agricultural Supply and Demand Estimates for October, which should pick up the latest numbers for US crops, and will be looking closely at production estimates for Canada, the EU, Russia/Ukraine and Australia.
Big crops get bigger most of the time, so we are likely to see more supply added to the Black Sea estimates. However, we are also seeing some constraints to the level of exports from Russia as they get close to their logistics limits for grain exports.   
Australia has just had a below average rainfall month for September across most of SA and NSW, and parts of Vic. That will have continued to hurt our yield potential.
The real news for Australia is rain in the northern NSW and Qld cropping areas. While too late to have a material impact on wheat production this year, it is setting the region up for a summer cropping program.  A good sorghum crop will replenish feed grain supplies, and stall the pricing regime that has been in place to attract grain to the north from southern Australia.
At some stage prices in the south have to move back closer to export parity, although constraints on the size of the SA crop should see strong competition from exporters as they strive to execute their pre-booked shipping slots.
In terms of pricing we need to see CBOT futures hold their upward trend, and move to the top of the trading channel as we approach our harvest. This mechanism will provide the base support for our wheat market.
There are some good signs for that to happen, with weekly export sales from the US hitting their second highest level for the year to date last week. That indicates that US wheat prices are still competitive in the global market.
Russian prices are also still holding up well and tending to push a little higher over time. This is probably being driven by logistics limits on how much wheat can be moved each month, as well as support from their currency.
Within Australia we would expect to see basis levels begin to weaken as harvest gets underway in more regions in the north, and as rains build the potential for an early summer crop.  At some point endusers will stop chasing supplies at any price, as they become more comfortable with the supply outlook.
It remains possible that we have already seen the pre-harvest peak in prices at the levels seen at the end of September. We will need a strong push from nearby gains in US futures, or a sharp downward revision in Australia’s production estimate, or a return to dry conditions in summer cropping areas to see those price levels tested.

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