Can't shake the harvest seasonal
When you talk to producers in the central plains, you'd think that harvest pressure would be non-existent this year; and understandably so considering the widespread drought (and let's not forget the frost from early in the season).
However, the price action this week was a different story as we succumbed to the seasonal pressure with another slide in prices -with Kansas City again leading the way.
But, it is true that the harvest will be a small one and over quickly, so harvest pressure will soon be behind us, most likely right in this mid-June time window. For hard red winter wheat, that is. Soft red winter wheat will surely be a much different story: large carryover stocks, increased acres, good growing conditions, large new crop, etc. What kind of harvest pressure will that present? And it's coming upon us quickly.
Even with the spread between KC and Chicago wheat at historic highs, it is very conceivable that they will get even wider. And certainly, the back months have room to rally to reach the highs of the front months.
What's also interesting to note is that Argentina is experiencing persistent dry conditions during their seeding period, and already are lowering expected planted acres. They've effectively shut off exports to their largest customer, Brazil, who is looking at importing wheat from outside the Mercosur trade bloc without import tariffs. Tight carryover stocks for Argentina and lower acres for the new cropâ€¦ with them as our biggest competitor in hard red winter, what kind of pressure will they offer to the market as we get into the winter? What will become of the KC/Chicago wheat spreads in the deferred months? And what if it doesn't rain in the southern and central plains in the next few months, what kind of planted acreage will we get for our own new crop in hard red winter wheat?
All of these are important questions as we turn the corner from a supply market to a demand market and obviously have plenty of rationing to do, something the market certainly did not accomplish this week. With this week's break in price, we've become much more competitive in the export market; a few big sales of hard red winter and we're suddenly looking at even further tightening supplies.
What's my point? Well, I don't think this bull market in hard red winter wheat is over. It seems to me that once the harvest pressure is behind us, the fundamentals point to a very strong market this fall, which could extend well into the winter - even with good growing conditions for Argentina's lower acres. A weather scare for them or continued dry conditions for us this fall just add fuel to the bull fire. And of course, a weather issue for corn or beans will pull the wheat higher as well.
Soft red is a different story entirely, but the Chicago market will surely be pulled higher by KC, so to be outright short Chicago is dangerous, but to be long the KC/Chicago spread I think will continue to work for several months.