Nobody said breaking the wheat market out of its slump would be easy. But besides trying to rally into the teeth of winter wheat harvest, bulls had to confront collapsing corn and soybean prices and a surge in the U.S. dollar as well. Toss in some of the best early spring wheat ratings in history and the wonder is that wheat was able to stay so firm for so long.
Spring wheat could still prove the market’s undoing over the next two months if yield prospects stay strong. Forecasts are starting to shift back towards a drier pattern on the northern Plains into the last week of June, which could come as harvest races north on the southern Plains, where production is among the lowest of the last 50 years.
But barring changes to yields in coming weeks, the market’s mettle must be proved on the world stage with exports. USDA as expected lowered its forecast of sales for the just-ended 2017 crop marketing year, but remains optimistic about a modest increase in the year ahead. My models agree with that forecast, but the price buyers are willing to pay could get a boost if supplies from other leading exporters continue to tighten. That appears to be what’s in the works as harvest gets underway in the northern hemisphere.
Russia has been added to the watch list after a dry end to its growing season for winter wheat in the south, and a wet start to spring wheat seeding. That spring wheat isn’t much of a factor in the key export markets Russia has come to dominate in recent years because it’s too far out of position in Siberia.
Canada also has dry areas, though nothing severe so far. The biggest question market remains in the southern hemisphere, where Australian production was downgraded by USDA in line with local estimates. Forecasts for the next three months remain very dry, though that’s the winter Down Under when it’s normally dry.
The latest forecast on the El Nino cycle out June 14 increased chances for the warming of the equatorial Pacific to be present by fall. My research shows a fairly strong correlation between El Nino during the northern hemisphere fall and lower yields in Australia. But it’s also associated, though less strongly, with lower wheat yields the following year in the U.S. With the southern Plains still in the grips of drought, poor seeding conditions this fall could also help put some support under the market.
Winter wheat contracts are still hanging on to patterns seen in bullish years on seasonal trends charts, which could support the market through the summer. One plus from the current pullback is an increase in carries, with July 2018 to May 2019 paying 7 cents a month for soft red winter wheat growers with on-farm storage and year-round markets. Covering the upside with a December call option spread is a good way to invest some of those anticipated storage returns, spending 10 to 15 cents for a dollar spread between strikes.
I’ve recommended being 50% prices with futures or HTAs sales and a short SRW December $6 call/long July $5 put. The puts expire June 22 so roll the short call into a short May 2019 SRW or HRW sale to hold for basis strengthening.
I’ve also put together class-by-class supply and demand tables for the 2018 crop; USDA won’t release its first take on these until July. These suggest a significant tightening of hard red winter wheat carryout, one reason why basis has been strengthening, with higher protein levels shrinking the spread between winter and spring hard wheat.
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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Market Review on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat futures that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.