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Analysis: US wheat futures to remain firm on uncertain weather prospects, stockpiling measures

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Analysis: US wheat futures to remain firm on uncertain weather prospects, stockpiling measures

Highlights

CBOT December contract at near 6-year high

Uncertainty around dryness mounts

Buyers accelerating wheat purchases

New Delhi — US wheat futures are continuing to gain support after hitting a near six-year high Oct. 19, with analysts expecting prices to remain firm in the near term amid market jitters around uncertain weather prospects in key growing regions and buyers adopting stockpiling measures.

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The most active wheat contract traded on the Chicago Board of Trade hit $6.36/bu in the day session Oct. 19, up 10.2% from the month before and 31.4% above the year-to-date low touched June 26.

The uptrend took the wheat contract to a high last seen in December 2014. The contract is considered a global benchmark for wheat.

Growing weather uncertainty in Argentina, Russia, Ukraine and most lately the US has been contributing to the price support, according to analysts.

US PLAINS CONCERNS

In the US, analysts have projected dry weather for the next few weeks across the Plains, which has received below-normal rainfall since the start of August and received virtually no rain in September.

The Plains is home to US' hard red winter wheat belt, with states like Kansas and Oklahoma the main producers. Winter wheat planting generally starts around September and a lack of moisture in soil during the season affects crop growth prospects.

Winter wheat emergence in key states like Oklahoma, Texas and Nebraska has been slower, the US Department of Agriculture's crop report showed Oct. 19.

The USDA's latest drought monitor report showed 41% of the total winter wheat crop is located in an area experiencing drought.

"Dry weather will continue across most of the hard red winter wheat belt in the Plains over the next week, maintaining stress on germination and establishment of the crop," weather agency Maxar said.

DIM OUTLOOK FOR ARGENTINA

The Rosario Stock Exchange recently cut Argentina's 2020-21 wheat production estimates to 17 million mt, 6% below a previous estimate in September, citing worryingly dry domestic conditions.

Initial estimates for the 2020-21 crop by the Buenos Aires Grain Exchange had pegged production at 21 million mt, which would have been a record.

The Rosario Stock Exchange's report helped wheat futures push past $6/bu as commodity funds continued increasing their long positions, according to an analyst.

Argentina is a major player in the wheat market, with Brazil and Southeast Asia the top destinations for its wheat.

However Argentina's northern region has now gone eight months without significant rains, and the Pampas region six months, with Buenos Aires being the only exception in receiving favorable rainfall, according to the Rosario Stock Exchange.

Lack of soil moisture and recent frosts have seen around 608,000 hectares of planted wheat in distress, with yield losses of 30%-50% in certain regions, the exchange said.

The plunge in production is expected to weigh on Argentina's 2020-21 wheat exports, which could hit a five-year low at 10.2 million mt.

BLACK SEA UNCERTAINTY

Uncertainty has grown around Russia and Ukraine's winter wheat harvest in 2021 as prolonged dry weather continues to worry farmers during the key planting season.

Winter wheat planting in Russia and Ukraine has been delayed slightly by dryness, supporting cash and future markets in recent weeks.

"In Russia, accelerating drought across the [southern region] continues worsening winter crop conditions and can noticeably affect the production outlook for the 2021 wheat harvest," said Victoria Sinitsyna, grains analyst at S&P Global Platts Analytics.

The southern region has seen the lowest rainfall in two decades since early September, according to an analyst. The region accounts for 43% of Russia's wheat production.

"Very warm and mostly dry weather maintained dryness concerns in far eastern Ukraine and southern Russia, maintaining stress on the establishment of winter wheat," Maxar said.

"In Ukraine, rains in the past couple of weeks have finally eased the dryness, but the planting delays will most likely translate into lower wheat planted area," Sinitsyna said.

STOCKPILING MEASURES

Big buyers in North Africa and Middle East have stepped up wheat imports fearing supply constraints after major exporters like Russia placed temporary curbs on grain shipments earlier this year during the coronavirus pandemic.

Egypt, the world's largest wheat importer, accelerated purchases to boost strategic reserves, while Algeria moved to diversify its sources of wheat imports by recently relaxing rules on bug damage.

China, which traditionally is not a big wheat importer and holds more than 50% of global stocks, has been on a buying spree, which analysts deemed stockpiling to sustain local reserves and price balance.

China's commitments for US wheat have been inching toward a four-year high, and it has also bought large volumes from France and Australia.

Over January-August, China's purchases of US, French and Australian wheat rose 11.4%, 9.2% and 13.5%, respectively, year on year, China customs data showed.

It is likely buying to ensure its reserves remain at full strength, Beijing-based analytics firm Cofeed said.

PRICES TO REMAIN FIRM

The forward curve of the CBOT wheat contract is seen moving into backwardation, which typically indicates buyers are looking for immediate delivery, according to Andrew Whitelaw, manager at analytical firm Thomas Elder Markets. Backwardation occurs when shorter-dated contracts trade at a premium to longer-dated contracts.

There are bullish concerns in the market as some countries look to stockpile and Chinese demand seems robust, while on the supply side, little early apprehension remains around the 2021 crop, according to Whitelaw.

The stockpiling and growing weather concerns have impacted market sentiment, boosting future prices.

Short-term wheat prices can be set back at any point, but mid- to longer term, current values will prove cheap, according to Nicholas Hoyt of hedge fund Imbue Capital.

Another analyst said traders with a bullish approach were eyeing their next target at $6.77/bu for the December wheat contract.

The contract has risen 10% in the past month and was trading at $6.29/bu at 10:55 pm CT Oct. 19 (3:55 am GMT Oct. 20).