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Wheat Gets Another Rally on Weather Concerns

After a weak start, wheat markets surged higher Tuesday and Wednesday followed by a reversal down on Thursday, only to find another round of buying on Friday. Soybeans led the way, pulling corn and wheat along for the ride. There is also a growing chorus about inflation ramping up, and the likelihood that commodities would rally in that kind of environment.

There was some late week chatter about dryness developing in the Black Sea region and stretching into the second week of May. Moisture reserves had been ample to start the growing season, but rains have been largely absent for the last few weeks and temps are increasing. The situation is not critical by any means, and the dryness is helping spring planting, but obviously bears watching.

Here in the US, hard red winter wheat production will be notably lower than average, with large swaths of acres being abandoned in the western plains. That realization finally appeared to grab the market’s attention this week, as more stories made headlines before next week’s crop tour.

The US problems are already well known, but the tour is expected to make them official. Wheat prices, while responding to US issues, were unable to maintain upward progress because we were the only problem in the Northern Hemisphere. But now with another potential problem lurking for a major producer, perhaps prices will get a bigger run.

That said, if Black Sea rains resume in early May, it would be hard to see wheat prices continuing higher. Wheat is caught between huge US and world stocks carrying over to this new crop year, and declining production this year. But to hit last year’s world production mark would be very difficult anyway, with much of last year’s spike being Russia’s monster crop.

Corn could likely be the market that pulls wheat out of the trading range. Corn is in a demand led fledgling bull market, and with lower acres planted this year could easily propel higher if weather turns poor in the Midwest. A rising corn market will pull Chicago wheat, and then the other wheats, along with it.

This week, we also began to hear chatter about an El Nino potentially quickly developing. That could suggest a weather pattern change for the US Midwest during the critical growing season in early summer. Obviously, that would be a game changer for price action as well. Funds seemed to grab onto the chance for weather markets as they apparently were large buyers of cheap call options in row crops. We’ve hardly planted any corn or beans yet, and the weather play has already begun.

STATS Canada released their acreage report Friday morning, giving wheat a bearish surprise. Spring wheat plantings estimates were much above expectations at 18.241 million acres, up 2.4 million over last year, a 15% jump. Durum acres were pegged at 5.777 million, up 567,000 over last year, an 11% gain. Canola acres were pegged at 20.784 million, down 2.2 million from last year, a drop of 7%.

Minneapolis was weak in response to that report with winter wheats higher throughout the day, but all grain markets surged higher into Friday’s close. Minn finished with gains on the day and eked out a gain for the week as well, up 6 on the week, while Chicago was up 32 and KW up 30.

Technically, charts show that prices managed to get back above the resistance of those Feb highs, which have been a major price action level. Chicago is back to the early April swing high, while KW is still about 17 cents below its early April high. There seems to be momentum building, but we’ll see if it is just fund short covering, since the Commitment-of-Traders report showed large funds adding to their short positions in Chicago, increasing their longs in KW, and switching again from long to short in Minn. They also decreased their longs in corn and soybeans, perhaps explaining the surge in grains before the weekend if they think a bullish attitude is developing from rising interest rates and investments moving away from equities.

For daily commentary and hourly market reports on wheat and cattle, listen to my podcast at: http://spectrumcommodities.podbean.com/

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