Rains Remove Wheat’s Weather Premium
Wheat markets began the week with follow-through selling from last week’s late sell-off. Prices stabilized after crop conditions showed little change, a surprise as the trade had expected a notable decline. Prices then tried to move higher only to find another round of selling late week.
Weather remains the key driver of price action. The rain forecast that broke the market in the first place last week began to waver, reducing amounts and shifting coverage to the south. However, by Friday that rain event looked like it was expanding to include the worst of the western Plains dry areas.
In addition, Friday’s longer term outlook called for follow-up rains by late April, something that was lacking in earlier forecasts.
It’s hard to rally a market when rains are coming during critical growing stages, even if yields have already been hurt and acres abandoned. And even if drought is still widely prevalent across the region. If nothing else, the rain will hold off further yield losses.
Aside from the improved outlook for U.S. hard red winter wheat production, the northern Plains look like they may also get a break from Mother Nature. With snow still on the ground across much of the North, the forecast finally suggests warmer and drier weather is on the way. Producers are hoping that it verifies as they are running several weeks behind schedule with fieldwork and planting.
As for the rest of the world, the wheat crop so far looks like it could be a very good one. Both Europe and the Black Sea region have plenty of topsoil and subsoil moisture reserves and are coming out of an easy winter with little stress to their crops. Longer term forecasts do not show issues in the near term, and the trade is presuming another big crop is on the way for Russia.
Russia will also have record carry-over stocks to start their next marketing year beginning July 1. They have dominated world trade for the last few years, and this year in particular, after a massive crop last season. That said, their domestic prices have crept higher recently as exporters have depleted nearby supplies, forcing them to reach further into the interior to secure wheat for export, in effect propping world prices as well.
U.S. prices are able to compete when they are at the lows from late March, but not when weather premiums are infused. So, as weather improves, prices take a hit. The recent strength in the wheat complex has significantly hurt export sales, with this week showing another paltry 170 TMT after a net decline for old crop. There is little doubt that USDA will again lower export projections in upcoming supply/demand reports.
As we get into the heart of the Northern Hemisphere’s growing season, we’re still casting glances at the Southern Hemisphere. Last fall, Argentina cut a good wheat crop right before their worst drought in 30 years decimated the corn and soybean crops. Now with winter wheat planting just a few weeks off, rains are coming again, so they should be able to establish wheat stands before dormancy.
Australia, on the other hand, had one of their worst crops last year due to drought, and the dryness has generally extended through their summer. It looks as though their planting season will get off to a dry start.
Technically, wheat futures have bounced back and forth from the mid-February highs, and this time have fallen below them again. It appears that we won’t get that seasonal rally into early May, when I was looking for a top. If the rains verify, it is very likely that seasonal highs were posted earlier this month.
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