A year ago winter wheat conditions dropped as fields came out of dormancy, triggering fears of damage that didn’t pan out nearly as bad as crop ratings suggested. But growers got a chance to sell into the summer when the market found its second wind due to severe drought on the northern Plains that slashed the spring-planted crop.
Price charts are hinting that the same dynamic could be ready to play out this year. But barring some unusual events, don’t look for version 2.0 to be nearly as dramatic.
While there’s still some lingering drought on the northern Plains, the concern now is cold, wet weather that hampered early planting. Though growers indicated hopes for increasing acreage this year, continued bad weather could convince some to shift ground to higher-priced soybeans.
After faltering below $6 into early April, the Minneapolis market rebounded. At first events to the south drove gains: drought, floods and freeze that cut yield projections based on declining ratings. But forecasts for improving moisture on the southern Plains triggered selling in winter wheat. So far Minneapolis is holding most of its gains, trying to notch a breakout on the chart that could trigger a new round of buying.
State-by-state yield models based on ratings and the latest Vegetation Health Index point to winter wheat yields of 45 bushels per acre. If spring wheat acreage doesn’t change and yields are normal, U.S. production could actually improve from a year ago. Still, if demand doesn’t get any worse and maybe improves a little, U.S. ending stocks have a chance at falling below 900 million bushels, helping average cash prices for the crop advance to $5.
Trouble is, new crop futures at all three markets moved into my projected selling ranges on the rally. Moreover, just maintaining demand, much less improving it, may be tough in a world market where there’s plenty of wheat to be had, right now, and likely in the coming year.
Conditions in the northern hemisphere so far appear mostly favorable. Germany, a competitor in the high protein market, was dry over the winter but received more moisture recently. France and the Black Sea region appear in good shape too. Canada has its dry spots on the Prairies, but overall moisture levels don’t look bad.
In the southern hemisphere, Argentina’s drought is ending in the big wheat growing areas, just in time for planting. Australia remains a question market – prices surged higher in April again as conditions remain dry ahead of planting. Forecasts call for improving moisture eventually.
Without big losses elsewhere, the U.S. could continue to scramble for business. Old crop sales are ending the 2017 marketing year on a sour note, with both sales and shipments faltering.
One big warning sign is implied volatility, a measure of the relative cost of options. Wheat’s had the highest VIX of any major market, stocks and crude oil included, a sign of a weather market. That measure broke hard this week, also a sign, this one of weather markets that may be ending.
I’ve recommended being 50% priced in winter wheat using soft red winter wheat futures and options for liquidity. The spread is trading near 30 premium HRW for July, with a high of 37 cents. Wait for opportunities to roll those hedges when more is known about yields. Growers with storage and need to make sales can sell very attractive carries in winter wheat, which are running 8 to 9 cents a bushel per month. Spring wheat growers should be 30% priced basis Minneapolis September.
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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.