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Louise Gartner: Drought conditions built-in

Last week, wheat prices started out very strong on disappointing weekend rains through the central Plains. It spent the next three days chopping sideways to lower before finding another surge higher on Friday’s supply/demand report.

Wheat has been well supported by the drought conditions in the plains and panhandles, but it became clear last week after Informa,  private analyst firm, released their winter wheat production estimates that the market has likely factored in those drought-induced losses. Informa projected that 8 million acres of hard red winter wheat in the central & southern plains will be abandoned this year, 19% of the total planted acres. 

They project that hard red winter wheat production will drop by 170 million bushels from last year. The kicker, however, was their estimate for soft red winter to increase by 183 million bushels from the large increase in plantings and very good growing conditions. So, if one were to only look at raw numbers for wheat, total winter wheat production is actually up 11 million bushels from last year, according to Informa. 

This helps to explain the non-reaction in the marketplace to the acreage abandonment estimates. The other explanation is that the drought area is well contained. The rains have been plentiful from central Texas up to central Kansas eastward into the Midwest. Western Nebraska is doing okay at this point and, of course, the northern plains have more than enough moisture – for now. 

If the market is going to make another move higher, it will need help from somewhere else. Corn continues to be a driving force for the wheat complex with large amounts of soft red moving into feed channels. That looks like it will continue, particularly after USDA’s supply/demand report showed corn ending stocks unchanged even after a drop in the quarterly stocks report. The corn market clearly has a big task of rationing old crop supplies and wheat will continue to move into the feed channels in order to get that done. That was clear on Friday when Chicago wheat outperformed the quality markets of both Kansas City and Minneapolis all day.

There may be help for wheat prices on the horizon from other sources as well. The dry conditions in Western Europe continue to elevate concerns of yield declines in France and Germany. Their wheat was planted into good conditions, but this spring has been unusually dry with warmer weather on the way. France is already considering water restrictions. 

China’s dry conditions keep showing up on the radar as well. While their winter wheat is 80% irrigated, they are still quite dry in the most productive winter wheat regions in the north China Plain. The far northeast region of China is also dry, key spring wheat country. Both of the regions are also major corn producers, which could become a major factor for the corn market (and thus the wheat market) if conditions don’t improve quickly as corn planting is underway.

Russia is also a key region to watch, but they received very good rains over the weekend across virtually all of their growing regions. Even Southern Russia, which has received almost no moisture through last summer, fall and winter, got very nice rains which should give them a great start to their spring planting season.

Technically, Kansas City took out the resistance of the March highs, but Chicago and Minn have not so far. The momentum of the market appears to still be strong and if corn continues its march higher, then wheat should be pulled higher as well. Seasonally, wheat has a tendency to move higher into late April/early May. Therefore, we’re entering the time window for an expected top. My guess is the rally will last into early May as there are enough trouble spots that need watching and the market needs a better look at world wheat production as well as spring wheat and corn plantings before focusing on the impending wheat harvest. 

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This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named.  Information is obtained from sources believed to be reliable, but is in no way guaranteed.  Futures and options trading always involve risk of loss. Past performance is not indicative of future results.

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