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Weather pushes up wheat prices

Wow! What a difference a week makes! Last week the wheat market was putting in new lows for the move, well below the major support levels. This week, the market got spooked by the increasing stress to Russia’s winter wheat crop and hot, dry conditions across the US central plains as the wheat crop enters its final stages. 

For the week, Chicago wheat was up $1.02; a 17% gain – the largest in 16 years. Kansas City was up $1.04, also a 17% increase while Minneapolis was just along for the ride - up $.51, or 7%. 

The market’s perception about the wheat market has almost reversed itself literally in just a matter of a few days, going from very bearish to suddenly bullish. However, the process leading up to that shift has been evolving ever since last fall.

For starters, the dry pocket of southern Russia never did recover from the drought of 2010, and those dry conditions created more planting issues last fall. We also watched Ukraine struggle with drought during their planting season – before it was even over they projected that their wheat production would be down 40% from the previous year. 

In late January/early February, we witnessed a massive cold snap that engulfed Eastern Europe and then progressed to the west, killing hundreds of people and thousands of hectares of wheat, barley and rapeseed. Even this week, well into the growing season, we’re still getting reports of more winterkill damage in Europe. On top of all that, much of Western Europe experienced three frosts/freezes this week alone, which were feared to do additional damage. To date, Europe is projected to produce 5% less soft wheat than last year, but that number could easily grow.

This spring, the area from eastern Ukraine through southern Russia into western Kazakhstan has yet to see meaningful moisture and temperatures are well above normal. Forecasts for the hot and dry sukhovei winds to come only add to the problem. This week, SovEcon projected that Russian grain exports would be down 28% from last year. 

In the US, a mild winter and abundant spring rains led to projections of a bin buster wheat crop in the southern and central plains. However, heat, dryness and winds are sapping the life out of the crop just as it tries to fill.

It sounds eerily like 2010 when the wheat market was on the ropes and all of a sudden Russian drought sent wheat prices soaring. This year, the dry area is not only much larger but is happening much sooner than in 2010. Granted, it’s still early and a good rain would put the brakes on the rally – but there isn’t one in the forecast; and sukhovei winds are never a good sign.

Also this year, large funds are holding a record short position in wheat and this week’s price action clearly showed major short covering. It was interesting to note that the Commitment of Traders’ reports showed that funds actually added to that short position as of Tuesday – ouch! Short covering alone could easily explain the sharp rally in so short a time, and that’s without even getting into long positions.Did I mention that Australia is dry on both sides of the country? Some producers are delaying planting but usually by early June, the planting window is closing down.

Technically, Chicago wheat soared right up to the old trading range high and closed there for the week. KC and Minn aren’t quite at their old highs, but are comfortably back into their trading range. It’s likely that wheat will pause to catch its breath, but I would expect pullbacks to be well supported. If the hot and dry conditions in Russia continue for another couple of weeks, we’ll see another leg up – which could easily be much bigger. I would expect the market to give the weather a chance to improve before completely writing off the crop but with yields already in decline, they won’t wait for long.  

The seasonal tendencies are off balance; usually winter wheat highs are established in early May with harvest lows from mid-June to mid-July. This year’s early maturing crop here in the US and the production problems elsewhere are pushing the seasonal out the window. Kansas will be harvesting by next week, way ahead of normal. 

The deteriorating crop along with huge demand should prevent wheat prices from testing the lows established just this Monday. This sharp move higher could well be the beginning of a longer term uptrend. Clearly, world wheat production will be down this year and that should be supportive longer term. The upside will be limited by abundant world wheat stocks and the expected huge corn crop. That said, if corn gets into trouble.

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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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