For years the wheat market stagnated waiting for a single trigger: A sharp reduction in global production. That worldwide event finally occurred this year, lifting prices to four-year highs.
Wheat is a market that likes to trend once it gets going. Bottoms typically occur around five years apart. Rallies eat up the first three years of the cycle, with down markets taking up the next two.
At least that’s the Cliff’s Notes version of wheat marketing. The last cycle took nearly seven years to con-firm. Fallout from the financial collapse a decade ago soured investors on commodities. And while U.S. acreage dwindled, other producers gained market share, namely Russia and its former Soviet Union satellites. Good weather and improving technology boosted their yields twice as fast as those in the U.S.
That streak ended this year in the Black Sea region. Yields and acres both declined, part of a pattern seen across the result of Europe too. Now, a brewing El Nino warming of the equatorial Pacific threatens to slash Australian production by a third.
If wheat returns to its old cycle, prices might be expected to rally into 2019. Dry conditions for seeding next year’s winter wheat crop extend from the southwest Plains to France, though Ukraine and Russia are starting to trend wetter. Production in Argentina should rebound, with good moisture as seeding ends.
A return to normal production will be needed to keep inventories from dropping further. The stocks-to-use ratio among major exports could drop to its lowest level ever by the summer of 2019.
But higher prices should lure more acres into production too. Futures are starting to show signs of fatigue, and that’s especially a warning sign for soft red winter wheat, which tends to top first in bullish years. Hard wheat contracts can extend rallies into September if conditions for seeding are a concern. Storms over the next week could help ease some of those concerns.
As a result, it’s time to get more aggressive pricing 2018 inventory after a $2 rally. Deferred futures are moving into my projected selling ranges. Winter wheat carries are rising again, not a bullish sign, but provide opportunity for good storage hedges for those with on farm storage and year-round markets. Also get started price 2019 winter wheat production.
USDA’s Aug. 10 report could lower the size of the U.S. crop, but this rally is about what’s happening around the world.
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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.