Wheat blow off top?
Wheat had a very sharp rally this week, up over 50c from April 5-12 in the hard wheats and running to new highs. This was a huge surprise as crop conditions actually improved Monday by 3%, with Pro Ag yield estimates up 0.3 bu for winter wheat. Yet the market seems concerned with a return to a warm/dry weather pattern in HRW wheat including KS, OK, and TX.
So is this a blow off top, or with new highs is wheat going to run a lot higher in the coming few weeks?
Fundamentals and technicals are now working opposite directions, with the technicals turning higher on the new highs as momentum has clearly turned back in the bulls' favor. Money is flowing into the commodities, and wheat is now the golden child after the most recent week. Hot/dry weather is the talk of the CBOT in HRW country, but flooding in HRS wheat country is also getting plenty of media attention. Raging gold/silver (pushing through 25 year highs almost daily) helps to increase the flow of money into commodities, so why not buy some grains, too (they're plenty cheap). Perception is reality in futures markets, and the perception is that the US wheat crop is going to hell in a handbasket -- burning up in the south and flooding out in the north. And there is nothing better to own than commodities!
The problem is that fundamentals (and the reality known today) shows HRS areas are drying up nicely, with ND projected to have an average start date of Apr. 18 for fieldwork. That's relatively early in the northernmost state in the US, and most HRS wheat growers are excited about how nicely the warm weather is drying up fields (except for a 2-6 mile stretch along the Red River). Even flooded areas today may get in the field by May 1, as water levels are not expected to last long (not anything like the 1997 flood -- the real reason for media attention in 2006). If HRS wheat producers are looking at the best potential planting conditions in some time, where is the bullishness coming from?
HRW wheat areas in KS, OK, and TX had well publicized problems with winter weather, with hot/dry weather causing unprecedented declines over winter in condition ratings. Pro Ag yield estimates dropped 1.5 bu from last fall freeze up into winter, so there was damage done to the crop. But 1.5 bushel is only worth about 22c in the market, and over winter prices rallied $1 or more. Then rain fell in mid-March and reversed a lot of damage, with winter wheat conditions actually improving this week in KS and staying steady in TX/OK (a time when they normally decline). Very warm weather this week (10+ degrees above normal) will stress crops in these 3 states, but other soggy wheat areas (SRW and northern HRW/HRS areas) will actually appreciate this weather. Not only that, it will likely allow early planting of most crops over the next 2 weeks, including corn that overall might be negative grains.
By far the greatest fear of grain buyers in wheat is either freeze damage (usually the greatest damage is an April freeze) and a US wide drought. Obviously, neither of these concerns carry much weight today as most of the US replenished their topsoil moisture (and about half the subsoil moisture deficit) during March. Freeze is obviously not a concern on wheat in 2006 (hot dry weather in HRW wheat country the next week will almost eliminate this threat). So what could possibly have triggered the enthusiastic push higher in wheat the past week?