After reaching a six-year high, wheat corrected to close mixed last week. Kansas City led the way down by dropping 21¢ off its high and ending down 9¢ for the week. Chicago slipped 25¢ from its high and lost 2¢ on the week, while Minneapolis was down 7¢ from its high but still gained 8¢ on the week.
In the bigger picture, it has been a remarkable rally in just the last month. From the early December high, Kansas City and Minneapolis both have gained 65¢ while Chicago is up 73¢. While wheat has its own set of bullish fundamentals, it was also trying to keep up with soaring row crop prices. Corn is up 72¢ since early December and soybeans are up a huge 140¢ from early December.
World wheat cash markets generally pushed higher last week, but some of the major countries are still celebrating their holiday season, so we don’t have a clear view of current price. What we can see, however, is that U.S. basis levels are largely keeping up with the futures, a remarkable feat considering how far futures have rallied.
The core fundamentals of the grain space are that world demand for grains is huge and it comes on the heels of short crops in two major producers in the Northern Hemisphere (Russia and the U.S.) and now significant crop stress in South America.
Soybeans are leading higher, like they usually do when bad weather strikes in row crop regions. Currently, we’re seeing major crop stress in Brazil and Argentina due to warm and dry conditions across much of those countries’ growing regions through the critical growing stages. The La Niña weather pattern that has created much this crop stress is expected to linger into the spring, albeit in a weaker state.
Private production estimates in Brazil and Argentina are dropping rapidly, and the market is anxiously waiting for Tuesday’s supply/demand report for a final look at U.S. corn and soybean stats and fresh input on South America’s outlook. The trade is clearly expecting a bullish report as prices held their huge gains into the weekend. We will also get the quarterly stocks report and the preliminary winter wheat plantings report on Tuesday.
Fund activity has also been huge to start the year. A weak dollar has made commodities seem cheap, and bullish fundamentals are creating a ton of interest in the ag space. With the stock market reaching nosebleed levels, investors are hunting for alternatives and commodities are looking promising.
While it will likely be corn and soybeans that carry the grain space in the near term (like around the next four weeks), wheat looks ready to stand on its own bullish fundamentals, but it will likely take longer to play out. We expect winter wheat plantings to be about 1.1 million acres higher, with many of those acres seeded into dry conditions.
We also see that Russian farmers seeded a record number of winter wheat hectares, but their planting conditions were even worse than the U.S., and they’ve had very little rain in the last couple months. With Russian wheat exports essentially shut down for the rest of the marketing year, there will be a notable shift in demand from them to the U.S. as we move into the spring.
This week, the Argentine government moved to shut down corn exports as drought conditions worsened and grain prices soared. They are also considering halting wheat exports as well following a smaller-than-expected harvest.
Demand for world grains is shifting to the U.S. at a time when we really can’t afford to see a lot more come our way. The weather threats are obviously more important in that light. Again, while corn and beans may be the leader in the near term, wheat will not get left behind as it can’t afford to lose supply to the feed grain market or acres to row crops in the spring.
Technically, the charts look stellar. We’ve had huge moves up so downside risk is increasing. But this rally is based on demand with some weather concerns stoking the coals. If the two-week South American forecast for continued dryness verifies, it is very likely that corn and beans take another big leg up just in the next week or so. Again, wheat will not be left behind if that happens. The crop reports are also likely to create a great deal of volatility, and those are just a couple days away.
It does not appear the bull run is over. The chart formations for corn and soybeans are very strong and suggest there is still another upward phase yet to play out; and that would be the acceleration phase, which usually culminates in a blow-off top. I am looking for that next (and final) phase to be right in front of us, as we work our way through the crop reports and weather events of these next two weeks.
If we do get that upward acceleration, it will likely be short-lived – just a few days – but it will be dramatic. So, be ready to peel off long positions and get hedges in place.
Longer term, as we get into spring, spring wheat will have to compete with corn and soybeans for acres, particularly in North Dakota where the options are much greater than farther west into Montana. Poorly established winter wheat acres are also at risk of being torn out and planted to other crops, so we could see Kansas City push higher to protect those acres as well.
La Niña is expected to still have some influence into early spring, which suggests the increased risk of dryness persisting across the western Plains. Some weather experts suggest the presence of La Niña increases chances of dryness into the Midwest as well, but the weather phenomenon may have dissipated by then.
If we get a price acceleration in the next week or two, it does set up for selling the grain space. That said, I would look for wheat to get a spring rally as well, likely reaching into the normal window of early May for a top, unless weather issues keep the rally going.
