Beyond Short-Term Drop, Support for Wheat

May 11, 2011 06:22 AM
Beyond Short-Term Drop, Support for Wheat

Wheat futures on U.S. exchanges may slip in the short term, but challenging domestic and European crop conditions suggest support in coming months.

Wheat futures in Minneapolis, Chicago, and Kansas City traded mostly 10 cents to 20 cents lower after USDA issued production and supply-demand estimates.
“The international situation is deteriorating day by day with drought in Germany, France, and Poland,” said Alan Kluis, market analyst at Kluis Commodities, Wayzata, Minn. A break in winter wheat futures likely will be short-lived, said Kluis on a conference call hosted by the Minneapolis Grain Exchange.
USDA today projected U.S. 2011-12 production of all wheat at 2.04 billion bushels, down 7 percent from last year. The projected 2011-12 season-average farm price of $6.80 to $8.20/bushel for all wheat would set a record high. USDA reported the 2010-11 average at $5.65.
“The survey-based forecast of winter wheat production is down 4 percent, as lower expected harvested area and yields in Colorado, Kansas, Oklahoma, and Texas sharply reduce hard red winter wheat production,” said USDA in its Agricultural Supply and Demand Estimates. USDA expects soft red winter wheat production to increase on higher acreage and yields while spring wheat output declines as yields back off from record highs of the past two years.
Carryover stocks of all wheat likely will fall from 976 billion bushels in 2009-10 to 839 million bushels in 2010-11 and 702 million in 2011-12, says USDA.
Too wet, too dry
“Spring wheat acres are likely to fall because of consistent planting problems,” said Kluis, citing sluggish progress in North Dakota and northwestern Minnesota. As of May 8, only 7 percent of North Dakota's spring wheat was in the ground, compared with the five-year average of 51 percent. Minnesota and Montana had planted only 18% of their spring wheat, down from the five-year averages of 60 and 61 percent.
On the Southern Plains, a lack of precipitation has plagued winter wheat growers since last fall. The crop this week rated very poor to poor on 77 percent of acreage in Oklahoma and 76 percent in Texas.
Mixed market opinions
Today's production and supply-demand reports suggested a lower open for the Chicago contract and steady to higher prices in Minneapolis, with Minneapolis likely gaining relative to Kansas City, said Kluis.
However, analysts at Benson-Quinn Commodities, Inc., Minneapolis, had a more bearish response, calling wheat futures down 10 to 15 cents in response to the USDA reports. The “USDA report this morning offered very little for the supply or demand bulls with both old- and new-crop ending stocks mostly higher than expected for corn, beans and wheat,” said Benson-Quinn.
USDA pegged 2011-12 ending stocks of all wheat at 702 million bushels, compared with average trade estimates of 658 million
Matt McGee, analyst at Country Hedging in Kansas City, also rated the supply-demand report as fairly bearish for grains and soybeans. Figures for wheat were relatively supportive, but he also noted the projected carryover higher than trade expectations. “We had lower than expected harvested area and yields in hard red wheat areas,” said McGee in his morning commentary. Production prospects fell, as expected, for Colorado, Kansas, Oklahoma, and Texas. “However, it was slightly offset by higher production numbers in soft red wheat,” noted McGee.
Kluis said spring wheat demand doesn't respond much to price, so he expects demand will continue while weather in North Dakota and into Canada likely will curb acreage and yield. As a result, he sees upside price potential, but with some limitation from soft wheat.
Potential global support
Globally, unless parched areas of Europe experience a major turnaround, supply and demand for wheat look positive, said Kluis. Benson-Quinn analysts noted that USDA expects global stocks to decline slightly in 2011-12 “as weather woes plague global production.”
Kluis expects wheat prices to run strong relative to corn prices.
“For a brief time in April, corn was at a slight premium to wheat,” said Kluis. He doesn't expect that to happen again in coming months. “We've lost some corn export business to feed wheat,” but wheat prices need to get high enough to pull it out of feed rations, said Kluis. “With the changing fundamentals, we can't afford to feed a lot of wheat in the world.”


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