September 19, 2007

 

US Wheat Review on Tuesday: Slides as Australia cut fails to surprise

 

 

Profit-taking drove U.S. wheat futures lower Tuesday as a substantial cut in Australia's official crop estimate failed to surprise the markets, analysts said.

 

Chicago Board of Trade December wheat fell 6 cents to US$8.69 per bushel. Kansas City Board of Trade December wheat dropped 9 1/4 cents to US$8.48 3/4, and Minneapolis Grain Exchange December wheat tumbled 9 1/4 cents to US$8.15 3/4.

 

The Australian Bureau of Agricultural & Resource Economics, or ABARE, slashed its 2007 wheat production forecast to 15.5 million metric tonnes, down 31% from its June estimate, due to persistent dryness in wheat-growing areas.

 

The cut was fundamentally bullish, but traders had already factored in problems with the Australian crop, analysts said.

 

Wheat futures at all three exchanges closed at or near limit-up Monday in anticipation of the report, and pulled back Tuesday in some "buy the rumor, sell the fact," they said.

 

There was little other unexpected new out to feed the bull market, said Dale Durchholz, analyst with AgriVisor.

 

"Last week you already had people starting to talk about 15, 16 million tonnes" for Australia's crop, Durchholz said. "A lot of people had already been talking about that. I think that was kind of old news."

 

The U.S. Department of Agriculture last week lowered its projection for Australia's crop to 21 million tonnes from 23 million tonnes. Traders had shrugged off the USDA estimate as too high.

 

Looking forward, more crop losses are possible in Australia with forecasts for little rain in growing areas, meteorologists said.

 

For the rest of this week, the DTN Meteorlogix forecast predicts conditions will stay on the dry side for almost the entire Australian wheat belt. A few light showers will form in Victoria and southern New South Wales on Wednesday, with West Australia receiving scattered light showers next Monday, the weather firm said.

 

"Crop losses will increase as the crop enters the critical heading stage during the next few weeks," Meteorlogix said.

 

ABARE's estimate for 2007 Australian wheat production was less than the output projection it issued last September for the drought-ravaged 2006 crop. In September 2006, ABARE pegged production at 16.4 million tonnes before sharply lowering its estimate in October.

 

The bureau put the crop at 9.5 million tonnes in October 2006 and then raised the forecast slightly to 9.7 million tonnes in December 2006. Actual output last crop year totaled a scant 9.8 million tonnes.

 

ABARE's new-crop export projection of 12.8 million tonnes also looked too strong based on the USDA's carry-in estimate of 3.2 million tonnes, said Bill Nelson, associate vice president of AG Edwards & Sons. Instead, exports appear headed for about 8.5 million tonnes, based on ABARE's new production forecast and the USDA's domestic use estimate of about 7 million tonnes, he said.

 

"If the crop is hurt even more by drought, the pullback in exports would be even more severe," Nelson said in a research note.

 

Without a surprising estimate from ABARE, there was not enough unexpected bullish news to support prices, traders said. Wheat is a bull market, and the bulls need to be fed every day, they said.

 

"It's getting difficult to make (the wheat market) more bullish than it already is," Durchholz said. "You're getting into a point here where it's getting harder to find that" daily dose of fresh, supportive news.

 

 

Kansas City Board of Trade

 

ABARE's crop estimate was seen as below the average trade guess, but the market could not sustain a push into positive territory after closing near limit-up Monday, a KCBT floor trader said. Traders remain nervous at high prices, and it seemed as though "there was a good amount of build-up before the report," he said.

 

Some Kansas hard red winter wheat growing areas also received some rains overnight, which was seen as slightly bearish because the precipitation added moisture to the soil, a trader said. The precipitation helped ease some anxiousness about seeding next year's crop, Durchholz said.

 

The USDA said 14% of the winter wheat crop was planted, down from 17% last year and the five-year average of 20%. In Kansas, 7% of the crop was planted, down from 12% in 2006 and the five-year average of 13%.

 

The rains were "probably dampening enthusiasm just a little bit," Durchholz said.

 

 

Minneapolis Grain Exchange

 

It was "a little surprising" that the market could not manage to hold on to any gains after prices rose overnight on the ABARE report, a MGE floor trader said. Demand still looks strong, with the state-run Trading Corp. of Pakistan saying it plans to hold an international tender for the import of 300,000 to 500,000 metric tonnes of milling wheat later this week, he said.

 

Technically, wheat futures are in an overbought condition and have room to step back from record-high prices, analysts said. Traders holding long positions know "there's a lot of vulnerability" for setbacks, Durchholz added.