Wheat approaches major support
Wheat spent the week grinding lower on continued pressure from USDA's crop report. There was little in the way of buying support, with the selling gaining momentum into Friday's close. We're quickly approaching the long term support at the October lows, and weâ€™ll soon see if they can hold up.
From a seasonal perspective, early February can be a tough time frame for the grain complex and wheat is no exception. There tends to be an increase in farmer cash sales, which pressures basis and futures. With the recent drop in prices, producers have taken to the sidelines, but could be forced to step up here and we would likely see more bushels have to be moved because of the price decline.
Once the market gets past about mid February, it begins to change is focus from old crop to new crop. And at least this year, the new crop prospects offer something interesting with upside potential. And of course, that would be the big drop in winter wheat plantings. Clearly, there will a significant decline in US wheat production this year, and the market will have to consider the possibilities of weather problems further reducing production.
Some would argue even the likelihood of weather induced rallies, since moisture conditions are more than adequate across the plains and Midwest. Even the dry pocket of southwest KS, southeast CO and the panhandles got some welcomed moisture. But weather problems come in all forms, and until the market feels comfortable with production prospects, it will be difficult to continue pressing prices as we go through the early growing season.
Seasonally, wheat prices tend to peak in late April/early May, and I see no reason why a similar pattern wouldn't evolve this year. April can bring lots of fireworks with it, and the stage is set this year for some volatile price action if weather becomes an issue in the spring.
If we do get a spring rally, however, I think it will be an important selling opportunity. With large carry-in US and world stocks, it will be hard to maintain a rally longer term. We are still in the grips of a long term bear market, so a spring time rally would be a welcomed opportunity to move old crop and price new crop. Again, I would plan for the late April/early May as the time window to price at least the futures side of the cash market. Basis tends to peak in early May for winter wheat and early June for spring wheat.
Ukraine reported over the weekend that ice has become a problem over about 1.3 million acres of winter wheat, which greatly increases the chances of winter kill. They had a similar problem 3 years ago, which ultimately killed about 2.5 million acres of winter wheat. The Black Sea region is always important, as they tend to set world price. Last fall, both Ukraine and Russia planted into dry conditions and wheat was not well established as it entered dormancy. Clearly, that region will need to be monitored very closely as we get into spring; it's just one more thing that could add volatility to price action.