Close up image of green wheat head

In light of the latest reasonably bearish WASDE report, the ag commodities have had a sharp correction. The start of the so-called ‘big data week’ saw a big wedge of profit-taking, combined with improved weather in key production areas. The findings of im-proved production and higher ending stocks simply led the market lower in the wake of the report.

The USDA also released their weekly crop progress update, showing that the seeders are maintaining an above-average planting pace. This is important as forecast rain in the next 7 days has the potential to slow down this pace, but also, allows the sown crops (corn & beans) to emerge and develop in time to reach their full potential.

Winter wheat is below average in terms of condition but also development.   Cold weather has delayed head emergence (34% compared with 48% on average).  I’m not sure this is a major issue, but looks stark on paper, relative to the improving outlook for the US crop.

With regards to corn (and wheat by association), it feels like there is going to be a tipping point.  We have seen a huge premium priced into corn due to uncertainty around the Brazilian crop.  But what happens if the US produces a bumper?  This week’s WASDE report confirmed very tight US ending stocks.  But the market will eventually turn from old crop tightness to new crop availability.  Speculative investors have been reducing their long (bought) positions in corn, perhaps due to the rapid planting pace and good rains recently.  If the market turns the spotlight off Brazil and focus’ on a big US crop, we may see the risk premium get eaten up.

Focussing on wheat briefly, Russian winter crop condition is in 89% gd-exc category.  Recent and forecast rain will keep Russian crop prospects looking good. There is a gap between what the USDA is forecasting (85mmt) and what local Russian analysts are saying (ranges between 77-80mmt).  The extent of winter kill in the Central Russian winter wheat area may have taken more than what we originally thought.  Similarly, French wheat will benefit greatly from recent moisture after a past dry spell. Wheat area is expected to expand 14% year on year.  Spring wheat in North Dakota and the Canadian Prairies still has time, but much of the Great Plains are very dry and will require a very kind Spring.  A very dry North Dakota (~50% of the US Spring Wheat) looks to get some showers this week, but time is starting to slip away.

The week ahead….

In order to see another leg up in the market, we will need to see a production issue emerge in the new crop.  Otherwise, without this, the market may start to follow the path of least resistance lower.

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Click on graph to expand  *WASDE report

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Data sources: USDA, SovEcon, Reuters, Mecardo

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