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Wheat Price Action Is Heating Up
The weather-market season is upon us.
Price action this week for all the grains was choppy, reflecting the changing weather forecasts throughout the week. Hot and dry conditions on North American spring wheat have significantly stressed that crop so far this year, but rains over the last week have helped stave off a disaster at least for now.
Traders fear that the Northern Plains drought will expand into the western Midwest and long-range forecasts are already hinting that is a real possibility, making this coming weekend’s forecasted rains very important.
The major weather models, GFS and European, have both had reliability issues, even for short term forecasts. So longer term outlooks have even less confidence. But the more reliable European model has been calling for dry conditions in the central plains and western Midwest for late June into early July. Of course, corn and soybeans would be at risk, with corn likely the most risk considering its major drop in acres and very high replantings, not to mention it needs way more water than soybeans. Obviously, if it stays dry into July, soybeans will join the party.
For wheat, along with US and Canada weather woes for spring wheat, we’re beginning to see weather stress in Europe, Ukraine and Australia as well. At this point, Australia is only in its planting season but crop watchers are sounding alarm bells about Western Australia’s extremely dry pattern and the rough start to the crop in the largest producing state of that country.
But for Europe and Ukraine, we see the dry pattern persisting and wheat production estimates are declining. There are signs that the dryness is creeping into Southern Russia as well, but crops there appear to be fine for now. Keep in mind, that Europe and Ukraine are also major corn producers, with Ukraine the world’s third largest corn exporter. And – most of Ukraine’s corn goes to China, who by the way is also experiencing dry conditions across major producing regions.
Coming into this growing season, world stocks of both wheat and corn were record large. Adding to those stocks are record South America corn and soybean crops. The world needed a production problem in the Northern Hemisphere to stop the slide in prices – and it sure got one, or several, for wheat. It looks like we could be on the cusp on that happening in corn as well.
Large spec traders have been aggressively short corn and wheat for quite some time, but not anymore. As of Tuesday, they completely neutralized their net short in corn by buying an astonishing 120,000 contracts in one week! They bought a lot of Chicago wheat and soybeans as well, but still carry a net short for both. It is very likely that they continued their buying spree later in the week as well, particularly on Thursday when the GFS weather model abruptly changed from wet to dry for later next week, reversing the market back up after Wednesday’s reversal down in head-snapping price action.
Wheat’s rally had been led by Minneapolis until this week, when Chicago took over. Large traders shifting from short to long and weather issues in Europe/Ukraine will continue to support the Chicago market. However, the fundamentals that drove Minneapolis in the first place are still generally in place. High protein wheat stocks are almost non-existent, and harvest results from the southern plains continue to show low protein, averaging 10.8% so far.
Egypt bought two rounds of wheat in the last week, unusual for this time of year when they have plentiful domestic supplies. Nevertheless, they’re in the market buying Black Sea wheat and giving us a good look at world prices. Russian farmers have been very slow sellers of their record crop from last year, and world prices have moved slightly higher over the last couple of weeks; if they have high protein that could well pay off. But it could also put them into a storage bind if their crops fare well through late June/early July.
Technically, wheat prices rallied above the major highs from early May, closing above them as well. The long-term bear market appears to be over, and we could be quickly switching to a bull market with little neutrality in between. Corn and wheat have been feeding off each other for over a year, and both are now on the cusp of their own fundamentals turning bullish – but will continue to feed off each other.
While it would be prudent to make some sales of high protein wheat if you have it, since the normal seasonal high is early June, I recommend replacing all sales with call options to get you through the summer (September options). Using calls to protect hedges would also be something to consider. If wheat crops continue to decline across the Northern Hemisphere, Chicago will take on leadership of the wheat complex.
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