The numbers reported in the US Agency report last week were mostly in line with market expectations, leaving the prices trading within a range over the week.
However, wheat prices were an exception, where the values were higher on the back of the expected Russian export duty.
Infact, wheat futures rallied sharply over the week principally due to the expectations that Russia will impose a $27/mt export tax on wheat from Feb 15th; this is besides already placed export quotas that are in place from the same date.
In our opinion, however, the price reaction was a bit of surprise, as export duty effective on a later date would usually mean spot prices would be under pressure.
Instead, prices moved higher in the Black Sea too.
Earlier Black sea prices had not moved lower in line with a price decrease in the US, as exporters refrained from selling a lower level.
The strength in Rubble has also disincentivized exporters from reducing their offers.
Food inflation is an issue for the Russian domestic market, and it is likely the export tax will be implemented to curb the inflationary domestic prices.
We were not expecting wheat prices to turn significantly lower; however, a rally of 7% over the given news seems an overreaction to
current fundamentals.
But, we still believe that fundamentals for standalone wheat are not bullish enough to result in a continued price rally, and the strength in corn prices usually would result in higher wheat prices.
Given that corn prices are not moving higher, wheat could presents a shortterm selling opportunity at current levels.
However, persistent risk of a rally in corn could spill over to wheat too.
Corn prices, infact, continue to be a function of the pace of Chinese demand for US corn and South America’s developing weather.
At this time, corn prices were rangebound over the week and did not move higher with adverse weather forecasts for South American corn-growing regions.
US Agency has estimated Argentine corn production at 49mmts vs. average market expectations at 46mmts.
This drop in production could add over 100mbu to exports from the US.
The Agency reported corn to carry out at 1.7 billion bu vs. average market guess at 1.69.
So, US Corn is still competitive in the world export market, and the US likely estimated carryout would continue to reduce, acting as a support for corn prices.
But to now, no improvement in weather forecasts for South America last week.
So, fundamental themes remain the same, i.e., developing weather in South America, demand for US production from China, and expected USD weakness on the back of continued quantitative easing resulting in higher commodity prices.
The eventual worsening forecasts and the resulting expected lower production could push demand towards the US.
But for now, in our view, this additional anticipated demand is not factored into the current US Agency carryout estimates.
The low levels of soil moisture in South America leave no room for error, where anything less than average rainfall could
severely impact the final yields.
So, bullish position and bearish view in wheat, are good balanced.
In other commodities like corn, soybean, soybean oil etc. we have a bullish consensus view on the prices.
Our suggestion:
Soybeans are still likely to go to push.
Corn price are looking at 410 levels.
Wheat maybe, will have a stop loss at 638.
