Wheat Market Eyes Expanding Drought In U.S. Plains
Five days can make a huge difference this time of year, and last week was a case in point. Monday’s gap higher propelled wheat above key resistance levels, setting the stage for a strong leg up. After a couple of days chopping sideways (even holding together after a slightly bearish supply/demand report), the market buckled when the forecast suddenly called for a good chance of rain across the central and southern plains in the 10-day outlook.
That was enough to bring out the sellers and prices ended the week back below the key resistance, closing below those important gaps. Freezing temps clearly hurt some heading wheat in southern Oklahoma, and more freezes occurred in the southern plains. But buyers will head to the sidelines when rain is on the way.
That said, the Drought Monitor shows the region of extreme drought increasing significantly this spring, engulfing all of Kansas and most of Oklahoma and Texas. The forecasted rains will be critical and if they don’t verify, their wheat crop will be in big trouble.
There is little doubt that a huge swath of acres will be abandoned, with notable damage in much of the remaining acres, but much-needed moisture will at least hold off further yield losses.
Basis seemed to hold steady for winter wheat on the break, but it is worth noting that not only did spring wheat futures avoid much of the pressure seen in winter wheat, but basis actually improved in some exporting positions.
If we’re losing winter wheat acres, spring wheat acres become more important. Planting intentions showed that spring wheat acres are expected to be about 1.5 million higher than last year, but major planting delays are generating concerns about prevent plant possibilities or switching to other crops.
Minneapolis futures are holding their support levels so far, and with improving basis it seems that the spring wheat market is a little nervous about production.
Export sales were disappointing this week with only 189 TMT sold, below the low end of estimates. Year-to-date sales are running 92% of projections against the average of 101%. USDA will almost certainly make yet another downward adjustment in projected exports in one of the two remaining supply/demand reports of this marketing year.
Commitment-of-Traders report showed large traders decreased the net short in Chicago wheat, increased the net long in Kansas City and decreased the net short in Minneapolis (making them almost even shorts/longs). Once again, they find themselves on the wrong side of the market, changing positions and then having the market move against them.
It is very hard to keep a rally going this time of year when rain is in the forecast, despite all the signs of major yield and acreage losses, and particularly when the rest of the Northern Hemisphere is looking just fine. Indeed, if growing conditions stay as good as they look now in the Black Sea region, we’re in for another year of major competition from Russia as they carry over record stocks and prepare for another big crop.
Upside potential was always limited in the wheat complex, but it sure looked like we could extend the momentum into early May, the normal seasonal time slot for a high. The bullish chart formations pretty much broke down by Friday’s close, except for spring wheat which still has potential. Perhaps we could still get a rally if crop condition reports show further deterioration, which Monday’s report likely will, but now the upside targets just take us to last week’s highs, instead of the early March high. Disappointing, but that’s the way I read the charts after the recent price action.
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