Louise Gartner: Spillover support from soybeans
Wheat markets tested the major supports this week, with some contracts establishing new contract lows just briefly before turning back up. Some spillover support did come from corn and soybeans which had very impressive weeks as well. The tight bean supplies along with slow crop development here in the US is creating another supply squeeze for beans, pushing prices sharply higher and bringing corn and then wheat prices higher as well. Export sales this week were above estimates for all three grains, adding to the positive tone in the grain complex.
The hard red spring wheat tour wrapped up on Thursday, projecting record yields and record total production for North Dakota. A cool and wet growing season got plantings off to a slow start but provided excellent growing conditions for the crop. The tour projected average spring wheat yields at 46.2 bu/acre, compared to last year's 37.7 bu/acre. Durum yields were projected to be 36.2 bu/acre, up 57% from last year.
With all of these bushels expected to be cut in North Dakota, analysts are also beginning to voice concerns about the protein content. The high yields would suggest a low protein crop, creating some nervousness about milling supplies, particularly considering that the Kansas crop had slightly lower than normal protein. That said, we did see good quality out of Nebraska and South Dakota; and Montana usually has high pro as well. Recent rains could spell trouble for regions of MT but it's not critical just yet.
With the abundant supplies of wheat around the Northern Hemisphere, the quality story may be the only thing for wheat to look forward to. We do know that Argentina will not be a player in the export market this year; and Australia is set for a big crop but El Nino conditions will keep that story in play until the fall.
If protein levels in this year's spring wheat crop do indeed come in low, then we can expect the price action to be in the cash markets and hedging opportunities to be limited. The futures market will focus on bushels, of which there are plenty. However, it will be the basis that allocates the quality. Typically, in low-pro years, we see premiums surge at harvest as processors scramble to secure supplies. Then the basis tends to level off through the winter, only to get another surge in late spring as supplies get tight and producers get busy in the fields. At this point, I don't see anything that would derail that type of price action.
The European harvest is finally getting into full swing and yields out of France are much better than expected. It was reported that French cooperatives were asking producers to store crops on the farm because the sudden jump in harvesting along with the high yields and large carryover stocks had led to a shortage of silo space. They, too, are experiencing lower than normal protein content and are seeing their protein premiums rise sharply.
In the short term, wheat prices could well tag along with what appears to be some fireworks in store for the soy complex. But the US is expecting record soybean production which will limit the upside in the soy complex as early bean harvest is just weeks away. If wheat does get spillover support from soybeans and corn, it would seem to me to be an opportunity to price wheat, particularly lower quality wheat.