Strategy Showcase – October 31, 2022
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Strategy Showcase – October 31, 2022

Happy Halloween! MarketsFarm has decided to treat the wheat market to a 20 per cent sale today to reward the rally in the markets. Pricing in the cash market is now mostly based on the March contract which closed the day at US$9.90 per bushel. The gain today was 37 cents per bushel in the March, which was good, but a bit disappointing. The gain today was based on the news that Russia wasn't going to renew the UN grain transport corridor agreement. As we mentioned in today's Daybreak/AM Report, the Russian rejection of the agreement may may not change the amount exported from Ukraine by a significant amount of wheat for the remainder of the crop year. The calculus that the market is trying to make in the wheat market is what will be the Russian response to the grain exports be after scrapping the agreement.

Mike's quick read on this Russian action is as follows…"though can’t read the politics or motivations better than anyone else…but give a 50 per cent  chance that this becomes a 1-2 day recalibration burp then back to old price trend (saggy); 40 per cent  chance that this process lasts 1-2 weeks whose price recalibrates in a volatile added-risk range 10 per cent  higher than before. And 10% that this becomes explosive if all hell breaks loose."

The problem is that the wheat markets are traditionally entering a weak period from the middle of November through the holiday season. This is the primary reason that MarketFarm chooses to advance sales on this rally. There is the chance that we see good follow through buying during this week or next, but the market will eventually move back to the flat market that has dominated since July. This is why we think that an incremental sale here is warranted. This sale brings us to 40 per cent sold on spring wheat, which leaves plenty left to sell if prices move higher in the coming weeks and months.

The USDA weekly crop report was bullish this afternoon for wheat (see below) which will probably provide some follow through support in the overnight session and into tomorrow's regular session. We recommend that you wait until tomorrow before making the sale as cash prices are likely to move into the C$12.25 to C$13 per bushel range depending on your location with a futures rally.

Making a cash sales today or tomorrow does not mean that we are bearish overall wheat fundamentals. The wheat market has been trading sideways for the past four months after hitting a peak last May. The market is due for a breakout, but the seasonal trend will likely prevent a significant move until the new year. Selling wheat at the top end of the trading range is never a bad strategy, so we prefer to take some risk off the table at this point in the marketing year. With only 20 per cent of the crop sold before today, MarketsFarm felt adding to sales at these levels is prudent action.

Wheat fundamentals remain bullish in the coming months for the following reasons:

1) The forecast in Australia continues to call for more precipitation in the coming week. This will cause more harvest delays and quality deterioration in eastern Australia. Most of eastern Australia will receive 25 to 75 mm of precipitation in the next two weeks.

2) Argentina's crop continues to deteriorate despite recent rains. The forecast remain very dry and the crop size is likely in the 12 to 14 million tonne range. Latin American importers are going to have to source wheat from Canada, U.S. and Russia. Importers have been waiting for the arrival of Australian and Argentine supplies to pressure markets lower. This will change as the market realizes how much damage has been done to Southern Hemisphere  crops.

3)U.S. HRW areas remain in very poor condition. Kansas crop conditions are starting out at 24 per cent good to excellent. Only 58 per cent of the crop is emerged in Kansas and time is running out for the crop to begin to grow. Soil moisture supplies are very poor with 59 per cent of the state rated as very short for subsoil moisture. This creates a real threat to the 2023 crop. The drought monitor map from last week shows it all. The Kansas - Oklahoma border is the area of the most extreme drought in the Southern Plains. It also happens to be the most productive HRW growing region.

4)Ukrainę sown area likely to drop by 30 to 40 per cent. Remember that the 2022 crop was planted before the Russian invasion and production will drop dramatically this year. The logistics of wheat planting is a concern in most years, but to plant a crop in a war zone is a nightmare.

In summary, we are advancing sales today to catch up on the marketing plan, but remain positive for wheat markets in the January through March quarter.

 

 

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