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Not buying wheat bullishness

Pro Ag senses a change in weather for grains this week that could have huge
repercussions for grain producers and buyers across the world.

Corn/bean
weather is turning more adverse, with warm/dry conditions beginning to envelope
the U.S. Corn Belt at a critical stage of development (reproduction). While corn
is far enough along that devastating yield losses may not be possible in many
areas, soybeans still have the most critical development stage ahead of them
(podding). While heat blasted the northwest Corn Belt this week (100-110 degree
highs), damaging both corn and soybeans, the majority of the Corn Belt had more
moderate temps (central and eastern Corn Belt) that prevented major crop losses
from occurring. That might change in the next 2 weeks if current forecasts are
correct, which call for warm/dry weather across the northern 75% of the corn
belt. Corn/soybean crop conditions and yield potential have already declined
for the past 2 weeks here in mid-July. Pro Ag expects even more significant
declines next Monday, though, as very little rain has fallen so far in the Corn
Belt this week.

While corn/soybean weather has turned adverse (hot and dry), this same weather
will accelerate wheat harvest, providing ideal harvest weather for the majority
of North America (both Canada and the U.S.). The remaining 60% of the North
American 2007 crop is in excellent condition, so Pro Ag expects yields to rise
in wheat for both Canada and the U.S.. This heat is just too late to do much
damage to U.S. crops, and even Canadian crops will suffer little from warm/dry
weather the rest of the 2007 season.

Pro Ag finds it interesting that U.S. wheat markets are following the thinly-traded French wheat futures at MATIF, with French milling wheat running to new
highs this week-dragging U.S. wheat futures prices to new highs as well. But
there is only about 75,000 contracts of open interest in this relatively small
market (and only about 2000 contracts traded daily on average the past year),
yet U.S. wheat futures are following it?

Media sources are reporting that
rains/flooding is delaying northern France and Germany wheat harvest, but Pro Ag
isn't buying this explanation. What about the warm/dry weather in U.S. wheat
areas for harvest? What about the catching up of U.S. winter wheat harvest to
normal levels (81% now vs. 81% average), in spite of the well publicized delays
in OK and parts of TX/KS?? What about the ideal HRS wheat harvest weather
forecast for North American wheat areas (U.S. and Canada)? Or more importantly,
what about the higher HRS wheat yield potential suggested in the crop conditions
report Monday? Pro Ag yield models rose a huge 0.65 bu/acre in U.S. HRS wheat to
over 40 bu/acre, the highest yield estimate of the year! Or what about
forecasts that call for below normal precip in most of France, Germany, and most
other western European countries over the next 7 days?

Quite frankly, something doesn't add up in this current media 'price following'
mentality. Instead, Pro Ag believes funds are playing one final game with media
reporters and price-following market analysts - the same who were most bullish
corn at $4.30+ futures! With spec and index funds long over 1 billion bu of
wheat today, what better place to push around a market than in France, where you
only need to buy 3-5,000 contracts of wheat/day to push prices sharply higher!

So, if funds get the U.S. price to follow, they might have a way to get out of at
least some of those long positions without losing $1 billion or more dollars as
they did in soybeans the past 7 trading days (note the loss posted in U.S.
soybeans the past 7 days was over $1 billion, with $1/bu loss in futures and
over 1 billion bu long.)

Pro Ag predicts that instead of a bull market emergence again in wheat, that
today's trade may be the start of a blow-off top in U.S. wheat prices. By August,
USDA reporting time, even USDA should be aware that northern U.S. winter wheat
yields were outstanding, with HRS wheat yields also perhaps the highest ever in
U.S.(and Canadian) history. With ideal harvest weather forecast the next 2 weeks
(warm/dry weather), U.S. and Canadian wheat quality of the remaining 60% of North
American wheat production yet to be harvested will be outstanding. We can only
rally so much on the crop losses from eastern KS, OK, and TX (already over $1.25
rally). While wheat prices could rally a few more days (and funds pad their
wallets with their spec buying spree), Pro Ag looks for a downside reversal
either this week or next to form a wheat top.

While many are touting the "hot/dry" HRS wheat weather, Pro AG finds it amusing
that HRS wheat yield potential jumped up last week based on crop conditions (only a
1% decline in a timeframe where they usually decline much more), with a huge
75% rated G/E vs. only 34% last year at this time. Even USDA couldn't miss the
bumper crop growing in HRS wheat country! And while almost all other analysts
were forecasting a rise in corn/bean conditions on July 23, Pro Ag correctly
forecast a decline in both, and an expected decline (albeit small at only 0.9 bu
corn and 0.2 bu soybeans) in yield model estimates as well. Actually, hot/dry
weather in HRS wheat country is helping wheat dry down and advancing harvest
(would this be bearish weather in France?). This hot/dry weather is hurting
corn/beans far more in the Dakota's, MN, and NE than it could ever hurt HRS
wheat at this stage.

Improving HRS wheat crops and declining corn/soy crops make for an interesting
mix compared to current price movements (higher wheat and lower corn/beans). If
you think funds don't have control of U.S. grain markets, then you only need to
look at the current evidence which certainly suggests otherwise!

Pro Ag also
wants to remind growers that index funds are still very active players in
markets. While spec funds participation is slowing (only long 10 mb wheat, 175
mb KC wheat, 450 mb corn, and 540 mb soybeans), hedge funds own 895 mb Chicago
wheat, 175 mb KC wheat, 1.825 billion bu corn, and 775 mb soybeans. The index
funds own two times the wheat carryout, one time the corn carryout, and three times the soybean
carryout. While fund participation in corn has declined the past few months, it
has increased in wheat/soybeans. The index funds have virtually full control of
these markets, and fundamentals don't need to make sense in the short run with
these players holding virtually all the cards in their hands!

Pro Ag would not be surprised by a reversal of fortunes in grains by the end of
the week, with corn/beans higher and wheat lower. It will be interesting to see
crop conditions next week, with Pro Ag expecting steady/higher HRS wheat yield
potential (small declines in crop conditions), while corn/bean yield potential
likely declined again for the third straight week. The historically large
wheat/corn spread also may work some magic, as world wide wheat feed use should
decline sharply over the coming months.

Pro Ag senses a change in weather for grains this week that could have huge repercussions for grain producers and buyers across the world.

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