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Todd's Take
Monday, July 15, 2019 3:35PM CDT
By Todd Hultman
DTN Lead Analyst

If you have been reading DTN's grain market commentary since June 28 -- or if you read Wednesday's World Agricultural Supply and Demand Estimates (WASDE) preview, "July WASDE: Mirage or for Real?," you know all about our argument with the National Agricultural Statistics Service Information's (NASS) 91.7 million acre (ma) corn planting estimate and the distortion we were expecting to see in Thursday's WASDE report.

Take a look back at the preview here: https://www.dtnpf.com/…

As expected, USDA used the June 28 planting estimates for corn and soybeans, resulting in a higher 2.01 billion bushel (bb) estimate of U.S. ending corn stocks for 2019-20. Shortly after the report was released, December corn prices fell 9 cents as high frequency traders took the bait only to find themselves flopping in a net a few minutes later.

By the end of the day, December corn finished up 8 1/2 cents and my feeble faith in rational markets was restored, at least for a day. Traders by and large had seen through the mirage created by June's flawed planting estimates and decided instead to believe their own eyes and rising cash corn quotes in the Eastern Corn Belt.

While USDA's supply and demand estimates for corn and soybeans decided to take the month off, a bullish surprise was taking place in wheat. Before Thursday's report, the month of July had not been going well for wheat prices.

Weather had turned drier and was more favorable for U.S. winter wheat harvest. Anecdotal reports from Kansas pointed to higher yields and better quality than expected. The most bearish turn of the month happened Tuesday as European wheat prices fell to new one-month lows, just two weeks after being threatened with hot and dry weather. The mood for wheat prices was clearly bearish heading into Thursday's report and I could find no reason for it not to be.

USDA did slightly increase its estimate of U.S. wheat production from 1.903 bb in June to 1.921 bb in July and pegged HRW wheat production at 804 million bushels (mb), up from 662 mb a year ago. However, USDA's estimate of U.S. ending wheat stocks dropped from 1.072 bb to a lower-than-expected 1.000 bb, thanks to an increase in old-crop feed demand and a 50 mb increase in the new-crop export estimate.

It is fair to be suspicious of an increase in the export estimate as the new season is still young. However, with U.S. wheat shipments currently up 49% from a year ago, a 50 mb increase doesn't seem like much of a stretch. Yes, 1.0 bb of U.S. wheat surplus is still a lot of wheat, but the larger share of Thursday's bullish surprise was in USDA's world estimates.

Glancing down the column of wheat crop estimates, we quickly see small or modest reductions for Australia, Canada, Europe, Russia and Ukraine -- all the major exporters other than the U.S. USDA's estimate of world wheat production fell from 780.83 million metric tons (28.69 bb) to 771.46 mmt (28.35 bb), a 344 mb drop in one swoop.

Granted the new production estimate is still a record high and represents almost a 6% increase from a year ago. Likewise, USDA's lower ending world wheat stocks estimate of 286.46 mmt (10.53 bb) also remains a record high, but Thursday's trade revealed a lightening of wheat's bearish mood. For one day, wheat's frown was turned upside down and short sellers were caught off guard as September KC wheat closed up 20 cents and Chicago was up 16 3/4 cents.

Where wheat goes from here remains dependent on weather, and the overall fundamental outlook for prices remains bearish at this point. Technically speaking, the most bullish of the three U.S. wheats continues to be the Chicago contract, and it's encouraging that September prices are holding above their 100-day average at $4.85.

As Thursday's WASDE report proves, bullish surprises are still possible, but we also need to keep our feet on the ground. In this environment, producers should view rallies in wheat as opportunities to sell.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman


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