Commentary
Wheat futures have advanced this summer, due largely to drought scorching spring wheat in the Northern Plains and Southern Canadian Prairies in my opinion. Hard Red Spring futures haven’t moved to new highs over 944.0, implying to some the bad news has been “priced in.” In my view it was surprising to see winter wheat futures take the bullish lead in late July and early August when traditionally the crop has just been harvested and supplies ample. This may partially reflect the market starting an early bid for winter wheat acres, with Fall planting set to begin next month. But it also could mark a reaction to diminished global production prospects. In particular, SRW (Chicago wheat)) and HRW (Kansas City wheat) futures opened last week with solid gains in response to news the Ag research firm Sov-Econ had slashed its forecast of the Russian wheat crop. It is my belief that the Trade cited a disappointing winter wheat harvest, as well as drought-hit prospects for its spring wheat crop. In addition, France’s farm ministry trimmed its fall harvest forecast. I look for a major reduction in wheat yields and area harvested from USDA and also feel they will get more realistic on Canadian production ion Thursdays report.
Reductions in world wheat harvests are the new input with Canada leading the way in my opinion. Global markets have taken notice as wheat markets led by Minneapolis and now HRW (KC wheat) is in play. It is my view prices can move substantially higher preferring KC wheat versus Chicago, as end users may prefer KC origin in favor of Chicago due to the scarcity of Spring wheat in both the US and Canada. I’m also considering looking at long HRW and short corn in the December position. I included a KC/Chicago weekly chart. Domestic wheat ending stocks last month came in at 665 million bushels led by a reduction in spring wheat. Thursdays report has the average ending stocks for all wheat at 644 million bushels with an estimated range of 590 million to 741. Spring wheat production is at 325 million bushels on the average trade guess versus 345 last month with a range of 300 million to 365 on the high end. Please quantify your risk here. I have plenty of strategies to consider in both the futures spreads and outright contracts.
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