Wheat prices to see more upside, volatility, analyst says

It was a bumpy ride this week for the wheat complex with a strong two-day surge to start things off, only to see the rally disappear by Thursday. Friday showed some promise but only managed a slight increase.

Most of the bullish action was in corn and soybeans, with South America returning to hot and dry conditions amid already falling production estimates. Soaring palm oil prices also helped lift soybean oil and soybeans into new highs.

For the week, Kansas City wheat was up 9¢, Minneapolis down 16¢ and Chicago up 6¢. Both corn and soybeans scored new highs for the move with corn up 20¢ and beans up 56¢.

While fundamentals are bullish for wheat, part of the reason it is struggling to keep up with row crops is it is the short leg of spreads by hedge funds and other large traders. They will be long corn and beans but spread the risk by being short another grain, and that pretty much means wheat.

Record wheat production in Argentina and Australia had a bearish impact on the market from late November to early January. That supply is now absorbed into prices and the market will focus on Northern Hemisphere supply for the next couple months, and then attention turns to the growing season for winter wheat.

Demand has picked up over the last week with wheat export sales a market year high of 737 TMT, just above the range of estimates. Year-to-date sales sit at 17.4 MMT down 21% from last year. The sales pace sits at 78% of USDA's estimate, 6 percentage points behind the average. Corn sales were also strong at 1.2 MMT; year-to-date sales are 43.9 MMT, down 10% from last year. The corn sales pace sits at 71% of USDA's estimate, 8 point ahead of average. Soybeans export sales last week also totaled 1.2 MMT; year-to-date sales sit at 79% of projections, 1 percentage point behind the average.

Egypt was back in the market on Friday, purchasing 420 TMT. They took 180 TMT from Ukraine, 120 TMT from Romania and 120 TMT from Russia (clearly not too concerned about supply disruptions from the Black Sea). They paid $347 - $350/MT CIF, about $12/MT lower than their most recent purchase last month.

I would expect to see U.S. export sales continue to pick up. With most Southern Hemisphere supplies spoken for, buyers will need to source from the tighter supplies of the Northern Hemisphere. And, obviously, if war breaks out between Russia and Ukraine, supplies will likely get much tighter as Russian sanctions kick in and Ukraine port disruptions become probable. We don't want to see fighting in the Black Sea, but it would be very bullish for wheat, corn, and feed grains.

While we're keeping one eye on demand and war potential, the other is turning toward weather – particularly in hard red winter wheat country from Texas to Montana, which is pretty much about as dry as it gets along throughout the Plains. This week, the central Plains got a shot of snow that will help a little, but it is a long way to breaking dormancy when the crop will need a good drink.

Bottom line, look for more upside price action with plenty of volatility. Seasonals usually see grains put in a high in early February, around the crop report. If that happens, I think it presents a pricing opportunity. We'll likely see another normal seasonal rally into early May as the battle for acres should be in full swing for spring planted crops.

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