Wheat futures under pressure

by Jay Sjerven
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While wheat production in the United States and around the world was expected to fall in 2016-17, supplies were ample, record large on a global scale, which may keep wheat prices low in the coming months. In fact, barring a weather threat to the wheat crop in the United States or other major exporting countries, wheat futures may decline and retest multi-year lows set in early March or even set new lows, according to wheat market analysts interviewed by Milling & Baking News, sister publication of World Grain.

At the same time, spring weather demands attention, and May 2016 may be one of the most volatile months for U.S. wheat markets in years, said Steve Freed, vice-president, ADM Investor Services, Chicago, Illinois, U.S. Freed said when industry executives gather in Kansas City, Missouri, U.S., on June 5-7 to attend the annual Sosland Purchasing Seminar, “Everyone will be happy and partying because prices are so low and look to be low for another year, or they’ll be drowning their sorrows because they didn’t buy at the low and we’re in the middle of a drought.”

Setting the stage for the 2016-17 crop year in the United States, the U.S. Department of Agriculture (USDA) in its annual Prospective Plantings report issued March 31 surprised the trade with a significantly larger-than-expected forecast for 2016 corn plantings but lower-than-expected forecasts for wheat and soybean plantings. Most unexpected was the department’s forecast for corn plantings at 93.6 million acres, up 6% from 2015 and above the entire range of pre-report trade estimates.

At the same time, the USDA forecast area planted to all-wheat for harvest in 2016 at 49.6 million acres, down 9% from 2015. It would be the smallest wheat area since 48.7 million acres in 1970. The USDA number was below the entire range of trade expectations that averaged 51.7 million acres. Wheat futures advanced in the wake of the report with the widest gains scored in Minneapolis, Minnesota, U.S.

Winter wheat planted area was estimated at 36.2 million acres, down 8% from last year and down 1% from the previous estimate contained in the Winter Wheat Seedings report issued in January.

The USDA said U.S. farmers intend to plant 11.3 million acres to spring wheat other than durum, down 14% from 2015. It would be the smallest other-spring wheat planted area since 1972.

“I was surprised at the cut in U.S. spring wheat acreage as I think most analysts were,” said Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Naperville, Illinois, U.S. “The trade had been expecting some decline, but not an almost 2-million-acre drop from last year.

“There were indications that farmers were getting more disenchanted with wheat when we got the Winter Wheat Seedings report in January. I think when the market saw that, it began to lower its expectations for spring wheat.”

But Meyers noted the March 31 report reflected farmers’ intentions, not final planted numbers. He suggested given the strength of wheat futures, especially Minneapolis wheat futures, compared with corn futures, northern Plains producers may end up planting 400,000 to 500,000 more spring wheat acres than the March 31 forecast.

Freed said of the wheat plantings forecast, “Long term, we continue to see a trend in which, based on price and returns, farmers are planting less wheat in the United States. I think when we look at global prices cheaper than U.S. prices, this trend is understandable and may continue.”

Global output also down

Given the smaller wheat planted area, U.S. wheat production was expected to fall in 2016 compared with 2015. World wheat production in 2016-17 also was expected to drop. The International Grains Council (IGC) on April 1 forecast world wheat production in 2016-17 at 713 million tonnes, down 3% from a record 734 million tonnes in 2015-16. The IGC forecast 2016-17 world wheat ending stocks at 211 million tonnes, down just 3 million tonnes from the record 214 million tonnes in 2015-16.

Meyers said, “If you first look at the production, yes, the U.S. crop is going to be smaller. My estimate is down about 90 million bushels from 2015; however, the carryover stocks in the United States may actually rise modestly.”

Meyers pointed out while U.S. wheat exports in 2016-17 may recover from the 45-year low outgo forecast for the current year, U.S. wheat disappearance overall in the 2016-17 crop year still may fall short of 2016 production plus 120 million or 130 million bushels in imports.

The USDA’s forecast for U.S. wheat exports in 2015-16 was 775 million bushels, the lowest since 1971-72, the year before the U.S.-Soviet wheat deal. Meyers forecast 2016-17 wheat exports at 875 million bushels, still low by historical measures.

World wheat production may drop 3% in 2016-17 compared with the current year, Meyers added, but with a forecast 1% increase in disappearance, world wheat ending stocks for 2016-17 may fall only a couple of percent from their current record levels. U.S. and world wheat stocks will remain ample.

The USDA on April 5 issued its first weekly Crop Progress report of the U.S. crop season. Winter wheat emerged earlier than normal across much of the country because of the relatively warm winter. In its first composite winter wheat condition rating of 2016, the USDA said 59% of the crop was in good to excellent condition with 34% fair and only 9% poor to very poor. That compared favorably with a crop rated 44% good to excellent, 40% fair and 16% poor to very poor a year ago.

Still, the vagaries of spring weather will keep markets on edge, Freed and Meyers agreed. But Meyers indicated he thought there was only a small weather premium built into the wheat market.

“Now we are getting into more critical time for the hard red winter wheat crop,” he said. “More of the crop is jointing, and moisture demand is increasing as weather turns warmer. If in early May, there has not been a pick-up in rainfall in those areas, we may see another 20 to 30-cent rally in futures. But I would still argue that as we go into May and June, unless the demand side picks up, I don’t know if you are going to be able to sustain the higher prices.”

Freed, looking a bit further forward, cautioned, “Our weather guy last week suggested we may flip from an El Niño to neutral or maybe to a La Niña by May. If that happens, there could be some net drying from Texas all the way up to Canada, which means we might not get the crop we’re expecting.”

Weak corn prices may pressure wheat prices in coming months, constraining any rally and even pushing prices lower.

“We have a tug-of-war between a very bearish corn plantings estimate and bullish wheat plantings,” Meyers said. “Corn prices may go down 20 to 30 cents over the next month if early planting conditions remain good. What this does is widen the wheat/corn spread, which means there won’t be much wheat fed, although, perhaps a little more than last year. I think bearishness of corn is the most bearish influence on wheat at this point.”

Given normal weather in the United States and other world wheat areas, both analysts suggested wheat futures may retest multi-year lows set in early March.

“There is a lot of bearish news for wheat, and the odds of it trending lower (given normal weather) is very high,” Freed said. “The only reason we would push higher is a weather problem. When acreage, yields and weather are discussed, some talk about $3-a-bushel corn. That would put wheat at $4.20 a bushel, given the current spread, and soybeans at $7.75 a bushel. So when we look at some of these markets, we still have a way to go down if we have good weather.”

Meyers said, “If we see normal rainfall over the next couple of months across the central and southern Plains, and foreign wheat production prospects don’t change much, I think we’ll see wheat prices drop 30, 40 or even 50 cents over the next four months. I think we can drop that much because I look at the supply-demand balances in the United States and the world for this year, and what’s likely to happen next year, combine that with what we’re likely to see in corn, and we may indeed see a retest of the wheat lows in the Kansas City July futures and maybe even make new lows in the September.”

Freed noted bakery flour coverage was about 70% complete for April-June, 30% to 40% for July-September and 10% for October-December. He said bakers would do well to cover additional July-September needs on further price weakness. He added there was the perception that the cash wheat basis has backed off, so basis coverage may be a play for those who thus far have held back. Covering the basis component of flour contracts now would be insurance against quality problems in the 2016 soft red winter wheat crop and future reluctant farmer selling of hard red winter and hard red spring wheat.

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