USDA actually had some good news for wheat in its otherwise bearish Nov. 9 reports. The agency cut its forecast of ending stocks by 25 million bushels due to better export potential, something I’ve said was warranted though I didn’t expect the reduction so soon.
But 25 million bushels is a drop in the bucket in a world with the biggest supplies of wheat on hand since the 1980s farm crisis. Nonetheless, wheat looks a little more determined to hold and perhaps begin a modest uptrend into the end of the year.
The brighter mood might not lift all boats, however. The only things soft red winter wheat futures have going for them is liquidity and a massive bearish bet by big speculators. Short covering could help the market stabilize, though exports remain poor. Basis is also strengthening, not due to demand, but because attractive carries provided anyone with storage to lock up wheat and hedge it for basis appreciation. That tactic is working, helping the December-March spread narrow a dime or more.
Other classes have a better case to make. A bad crop in Australia helps exports of U.S. white wheat, which could get even better if rains hurt quality at harvest down under. Tighter stocks of hard red spring wheat could bear watching if precipitation doesn’t improve on the northern Plains this winter. And hard red winter wheat is finally attracting some business as supplies of higher protein wheat were also limited by problems in Canada and northern Europe. That’s helped firm HRW basis and tightened old crop carry spreads too.
The December HRW chart is also looking more friendly, after breaking out of a downtrend in place off September rebound rally highs.
Still, upside in old crop looks limited unless importing nations become convinced that they may face shortages in the year ahead. Rains appear to be improving in the Black Sea winter wheat region, known for volatile yields. After for record yields in a row, the Former Soviet Union could be due.
Another threat could come from the La Nina cooling of the equatorial Pacific that forecasters say has a 75% chance of developing this winter. Historically, La Nina’s impacts on wheat are mixed. It can lower yields in Canada and Europe, But it can aid yields in the U.S. by improving moisture on the northern Plains.
The pattern generally brings warmer and drier winters to the south, including the southern Plains. That could limit moisture but it might also keep damaging cold at bay too.
Initial conditions for winter wheat are about average, with yield models in line with last year. The main question right now is whether growers will seed fewer acres due to low prices and the late fall harvest. USDA weighs in on that question Jan. 12, which could produce some modest lift for both old and new crop prices.
I previously recommended being done with old crop, selling the carry in winter wheat futures to wait for basis gains and covering the upside with $5 May calls. I also recommended pricing another 10% of spring wheat production after futures tested upside resistance last week, along with 30% of 2018 production for all three classes. Only Minneapolis September is in my projected selling range for new crop, so catch-up sales are in order there.
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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.