It’s Valentine’s Day, and wheat is feeling the love. Whether the romance can last remains to be seen.
Winter wheat futures rallied to six-month highs, with a little help from friendly USDA reports Feb. 9. The government cut its forecast of 2016 ending stocks by 47 million bushels due to stronger exports. Global supplies projected on May 31 fell nearly 175 million bushels. Both changes aren’t as bullish as they seemed to some on first blush.
At 1.139 billion bushels, USDA carryout would be the largest since 1987. The cut worldwide still leaves projected leftover inventories at record levels.
Big speculators have been selling soft red winter wheat, the most popular futures contract, since May 2014. That provides plenty of room for short-covering, with volume boosted by the Goldman roll, when funds following the index move positions out of the nearby. March SRW rallied to its 200-day moving average before hitting headwinds, with the monthly chart bumping into long-term resistance. Hard red winter wheat did better, but fell short of a couple of July highs on the chart after breaking through its 2015-2017 downtrend.
Wheat’s suitors come mainly from those following cycles, who note it’s time for a shift to higher prices. Wheat is also showing a strong correlation to the stock market on index fund buying. But while farmers in the U.S. are heeding the message of the market and slashing acreage, other growers around the world are not. Lack of weather threats is also keeping end users on the sidelines
Only one-in-five U.S. winter wheat acres are in areas with drought. Texas, the only state reporting weekly conditions now, showed declining ratings last week when much of the growing area was dry. That’s changing this week, with above average precipitation seen over the next two weeks for the central Plains too. Warm temperatures should bring the crop out of dormancy early, making it vulnerable to frost in April, a time when several crops suffered big losses. But April is a long ways away.
Wheat fields from Eastern Europe into Ukraine and Russia battled sub-zero temperatures this winter. But most of the ground had snow cover, limiting losses so far. Moisture is expected to return next week, with no threatening cold in sight yet on weather maps. Western Europe was dry over the fall and early winter, but moisture improved over the last 30 days, with more in the outlook for next week.
Without big reductions to supply, the global balance sheet isn’t likely to tighten much in the coming year. Lower acreage should reduce U.S. ending stocks on May 31, 2018, but the surplus could still top 1 billion bushels. Average cash prices might run 30 to 50 cents above those for the 2016 crop. New crop winter wheat futures are within my selling ranges, at least on deferreds out to March and May 2018, while Minneapolis September is already there. We’ve recommended being 40% hedged, and it’s time to move that to 50%. Selling deferred soft red winter wheat futures for winter wheat captures nearly five cents a month carry for a cushion.
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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.