In the last week or so, the long-term downtrend had been bucked somewhat. There had been observations that the Russian export pace was slowing down, China was in the market, the Argentine wheat crop was worse than expected, and more recently, rumours that Russia may implement an export quota.

Last night, the USDA put any bullish chatter to bed for a while. In essence, a combination of better yields and an uptick in harvested area showed an increase in production across all commodities. The fact the market was expecting a slight trimming of production caught everyone off guard, with the result being double-digit losses in wheat and beans and a near 2% drop in corn, despite finishing the session off its lows.

With the USDA report now behind us, attention will again turn to weather in the Southern Hemisphere, Chinese demand, and the ongoing drama in the Black Sea.

South America is the continent garnering the most attention right now. Argentina did have some rain recently, but the consensus is that it was too little, too late. The Buenos Aires grain exchange (BAGE) recently cut Argentine production by a further 5% to 15.4mmt, compared to 12mmt last year but against the 22mmt average. Rosario Grain Exchange went a little further this week, calling the crop at 13.5mmt.

Brazil is in a state of two widely differing fortunes. The southern areas are too wet. There is speculation that some crops may need replanting. Conversely, the central and northern regions are dry and hot. The key producing state of Matto Grosso is 50% through seeding (soy), behind the 60% average at this time of year. The next 15-day forecast remains dry which is going to start putting pressure on the soy complex.

Europe has just had the remnants of ex-cyclone Ciaran smash into the western coastline of France and Spain. There is some concern that waterlogged crops may need reseeding or in some areas, may prevent seeding at all. French farmers are estimated to have sown 35-40% of their winter crop program. Experience would say that the total area affected would be relatively minor, but the market does love a good story.

The cash market is going to remain in the thrall of Russian prices. FOB values are now trading privately at US$225 as traders try to revive a flagging export program. This has had the effect of lowering FOB values across the globe as other origins struggle to compete. For reference, Canadian (CWR) wheat is US$310 FOB, US Gulf (HRW) is US$285, French (12.5% pro) US$250 and Aussie APW US$290.

It would be relatively easy to mount an argument for wheat prices to rise into the New Year, especially if the Russian export pace continues to struggle or if the bean crop in Brazil is a disaster. Someone is just going to have to tell these markets that fundamentals do matter.

Next week

Keep an eye on weather forecasts in Brazil. Another week of no rain and temperatures in the high 30C’s is going to start stressing crops. The Aussie harvest is running well ahead of schedule, with some areas already wrapping things up. Quality is generally very good in these earlier districts, although yields perhaps a little disappointing due to a tight finish, frost, or a combination of both.

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Click on graph to expand

Click on graph to expand

Data sources: Reuters, SovEcon, Mecardo

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