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Louise Gartner: Wheat follows corn

As we move into April, weather is a huge player in the winter wheat complex. Dry conditions have been the story in the western Plains since last fall during planting and really haven’t improved since. The crop was already stressed going into the winter season with poor germination, poor emergence and spotty stands. As we enter the growing season, the conditions have only worsened across much of the western plain and there is little relief in sight. Forecasts are calling for cold temps to dip down into Oklahoma and even Texas early next week. While the market has priced in some yield reductions, if conditions don’t improve very soon, we could see prices rally further in response. 

The month of April often sees choppy price action, largely depending on the rains. However, the seasonal tendency for winter wheat is to peak in early May. Weather and corn will continue to be drivers of the wheat complex, but from a fundamental perspective, it seems unlikely that wheat will break hard unless we get widespread, soaking rains in the western plains.  

Spring wheat has its own story this year. The last two years of generally low-protein crops have pushed hi-pro premiums steadily higher. This week, those premiums soared as end-users rushed to find supplies. Farmer sales have been slow, with wet and muddy conditions hampering grain movement across the northern plains. The normal seasonal pattern for spring wheat prices tend to peak in early June, but spikes like we saw this week are great selling opportunities.

There is also the China weather story that won’t go away. They, too, had dry conditions since last fall but since 80% is irrigated, it’s hard to get too excited about yield reductions. However, recent reports out of China talk of disease problems being a growing issue in their most productive northern regions along with an insect infestation. At this point, it doesn’t appear to be critical but is certainly worth noting. This week’s cold weather appeared to be a non-event for them.

The technical picture offers up a slightly different look than what the fundamental situation would suggest. Fundamentals suggest steady to higher prices based on adverse weather conditions. But the charts show that prices reached the major resistance of the early March highs in Kansas City futures and then stalled. However, Chicago and Minneapolis still have a ways to go to reach those swing highs. Those early March highs are still major resistance, with Kansas City obviously having the more likely chance of breaching them.

For me, the bottom line is still weather. The market tried several times on Friday to press lower but just could find momentum to the downside. It’s early in the growing season, and rains could still help, but it will be hard to press wheat when corn is so strong, crop conditions are so poor, and the northern plains are still looking at planting delays.

Grain markets got goosed last week, with a bullish stocks report for corn and soybeans. The long-awaited plantings and stocks report gave traders plenty to talk about, but most of the conversation centered on the lower than expected corn stocks. 

USDA’s estimate of corn stocks on March 1 came in at 6.523 billion bushels, 170 million less than the average guess. In a normal year, that wouldn’t seem like a big deal, but this year already has very tight ending stocks projections. Those just got much tighter with the stocks to use ratio now projected at an all-time low. Corn prices responded with a 73-cent rally in two days.

Wheat, on the other hand, saw stocks about 25 million bushels higher than expected. Plantings were also notably higher than expected, particularly for spring wheat (700,000 more acres than the average estimate). Even export sales were lighter than the low end of the range. Wheat did not get one piece of bullish news in Thursday’s reports. Why, then, was wheat 46 cents higher? Because of corn. And weather.

While wheat is seeing a developing weather story unfold in the central and southern Plains, the bullish corn market continues to offer a very solid base of support. Hard red winter wheat prices are near a level with corn that could draw it into the feed channel in the southern Plains. With the worsening crop conditions of the new crop, the market is wary of allowing old crop stocks to disappear into the feedyards. 

Soft red has more stocks and better new crop outlook that could allow more movement into feed, but there is no doubt that quality stocks of wheat need to be protected. So as corn prices go, wheat will follow - at least until corn stocks are at more comfortable levels. With the prospect of wheat production taking a hit this year because of poor weather in the key central Plains, the price battle between wheat and corn could continue for several months.

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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