Weather will drive the wheat market from here on out, analysts say
Bullish signs in the wheat market have been building as hot, dry weather has withered prospects for competing wheat and U.S. corn crops.
"Weather in the United States and world is going to be the driver for the wheat market," said Greg Wagner, GWX - Ag Advisors, based in the Chicago area.
The direct effect will be on wheat yields and quality, and the indirect effect will be through the corn market, said Wagner in comments on a CME Group panel discussion after floor trading closed June 29.
September Chicago wheat futures already soared more than $1 in June to settle at $7.5725 on June 29. September futures at Kansas City made a similar trek in settlements from $6.53 June 1 to $7.56 on June 29, with several contracts reaching into the $8 range. At Minneapolis, September wheat futures gained more than $1 in the month to settle June 29 at $8.445.
The wheat market is "in a bit of a follower mode," said Dan O'Brien, economist at Kansas State University.
"It's hard to see corn having a problem and high prices this fall, and wheat not following suit to some degree, given the potential for substituting between crops in feed rations if we get tight on corn," O'Brien said.
Kansas wheat basis at major terminals backed off in May, but recovered and stayed strong through harvest, O'Brien said.
Kansas elevators didn't carry over big supplies of grain from last year. The state's wheat yields are variable and the Kansas crop may reach 340 million to 360 million bushels, rather than the indications of more than 400 million bushels on the Kansas wheat tour early in May.
"In really good years, elevators try to move the wheat crop fast before the fall crop hits," O'Brien said. "Now, there are concerns about the fall crop," mainly corn and grain sorghum. "For most elevators in Kansas, I think our biggest worry isn't huge piles of grain this fall. The biggest worry is adequate harvest of fall crops."
Wheat Acreage Surprise
"When we break down the acreage number, there were some surprises here," Wagner said of the wheat numbers in USDA's June 29 Acreage report. "Particularly the trade was anticipating an increase in spring wheat acres. That did not occur."
Private analysts had expected USDA to report about 12.7 million acres of spring wheat. "USDA came in at 12 million acres, so that's slightly supportive," said Wagner.
USDA estimated spring wheat plantings down 3% from last year. Although hard red spring plantings are lower, estimated durum acreage is up 61% from last year at 2.2 million acres.
Estimates Slip in Black Sea Region
"The wheat market is responding to weather," Wagner said. "Weather both here domestically in the United States as well as what is going on in the major wheat-growing regions of the Northern Hemisphere. I'm speaking specifically of the Black Sea Region."
USDA and private forecasters have suggested that wheat harvest in the Black Sea region will fall as much as 25% from last year. "If this is realized, it's going to substantially alter the world supply-demand balance sheets and it will serve to support wheat," Wagner said.
USDA's Foreign Agricultural Service said in its June world grain circular that last year's record-high global wheat demand led to lower estimates of carry-in stocks in Argentina, Australia, Kazakhstan and the United States. FAS also estimated that Black Sea region wheat crop prospects had fallen 20 percent as of last month and exportable supplies tightened.
A year from now, global export supplies of wheat likely will reach a four-year low, FAS said.
"If faced with further reductions in output, Russia and Ukraine could limit exports, as they have done in two of the past five years," FAS said, noting that exportable supplies are also forecast tight in Argentina, Australia, and the European Union. "In contrast, exportable supplies in the United States are abundant."
This week, the International Grains Council said Russia's crop prospects have been deteriorating. "Smaller export surpluses in the Black Sea region will see demand switch to other origins in the year ahead, especially the United States," reported IGC. It cut its estimate of combined total grain exports from Russia and Ukraine to 37.1 million metric tons, down 15% from its projection six weeks earlier and down 21% from 2011-12 exports.
Support from Corn, Eye on Quality
"I personally don't believe that given the crop conditions ratings and where we are in the corn growing season the market has fully incorporated the yield loss that's been attained so far," said Wagner on the CME panel.
When asked how flooding in some northern wheat areas may affect the crop, Bill Tierney, another CME panelist, said the wheat crop has developed enough to be beyond yield concerns.
"Once the crop is in and gets to this point, they tend to worry about wheat diseases," said Tierney, chief economist for Ag Resource Company, Chicago.
"The market tends to pay attention to bushels," said Tierney. "Millers watch quality." However, any quality problems may affect protein premiums and the Minneapolis-Kansas City futures spread.