By John DePutter & Dave Milne – May 15, 2018
“According to the USDA’s first look ahead at the 2018/19 crop year, global stocks of wheat could fall for the first time in six years.”
– DTN, May 10, 2018
What it means:
The potential for higher prices and some relief for long-suffering wheat growers.
Wheat has been beaten down so badly for so long that producers might be forgiven for thinking this market might never turn around.
But one basic tenant of the markets is what is cheap eventually becomes expensive and vice-versa.
World supplies remain heavy
Admittedly, the basic wheat fundamentals would suggest we’re certainly not at the point yet where prices have been low enough for long enough to discourage production and help push prices higher. Indeed, in its May supply-demand outlook, which contained the first projections for the upcoming 2018-19 marketing year, the USDA last week pegged new-crop world wheat ending stocks at still-heavy 264.33 million tonnes, down just 2.2% from a year earlier and above the 2016-17 level of 255.89 million.
US wheat ending stocks for 2018-19 were also projected lower from a year earlier, although that decline was more modest than expected as well, owing to a forecasted sharp increase in combined American spring wheat and durum output – enough to more than offset a drought damaged US winter wheat crop.
Given the projected heavy US and global supplies for 2018-19, it’s been no surprise then wheat futures have been generally under pressure the past number of days.
July Chicago wheat:
A buying opportunity?
So, we’re looking at heavy supplies and lower prices.
Sometimes, that can be the best combination for a bottoming market.
And heads up! A sketchy start to spring wheat development in various parts of the world could spark a move higher. The dry weather problems in the US southern Plains are already well known, but as seeding begins in Australia, very little rain has fallen in the southeastern production regions the past two months. Meanwhile, primary wheat areas near the Black Sea coast are reporting less than 25% of normal rainfall over the past 30 days, with some pockets seeing less than 10%.
And closer to home, moisture conditions in parts of the main US spring wheat production area and the Canadian Prairies are certainly not ideal either.
Given the existing supply cushion, there seems little chance there will be enough of a weather wreck this year to slip wheat into a shortage and spark a massive rally. As most wheat producers know, there are wheat crops being harvested somewhere in the world essentially every month, and there will likely be enough good crops to help offset the bad.
But that doesn’t mean a moderate rally can’t happen. Wheat has seen lots of moderate rallies the past several months, and why couldn’t another rally or two come forward in the weeks ahead?
Remember too, the market isn’t just about supplies. If investment funds were to decide to collectively buy, regardless of the fundamentals, that buying could drive prices higher – even if just for a short while.
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