The outstanding feature in wheat futures in the past several weeks has been a hasty retreat from contract and even multi-year highs posted in early July. By the close of trading on Aug. 8, December futures had dropped $1.14¼ a bushel in Kansas City, $1.08¼ in Chicago and $1 in Minneapolis, which equated to declines of 19%, 18% and 12%, respectively.

Analysts agreed the rally in wheat futures that saw prices surge from mid-May until the break in early July probably had been overdone, resting on efforts to build a weather premium into the market in the event of a disastrous spring wheat harvest. The market turned lower when traders considered that the one serious weather problem in the world was centered in the northern Plains. Meanwhile, global supplies were large, no other major growing regions faced weather problems as dire as those seen in the Dakotas and Montana, and the U.S.  winter wheat harvest came in about as expected. So wheat futures since early July tumbled as much of the weather premium was pulled out of the market.

Matt Beeson, president, Beeson Associates.

“It’s rare that spring wheat dies without anything else dying,” said Matt Beeson, president, Beeson Associates, Crestwood, Kentucky, U.S. “But the winter wheat crop, other than the quality, was okay, so spring wheat, which was dying in June, captured the market’s attention. Then the market came to the realization we still have a lot of winter wheat and that we’ll have another corn crop that may be average or a bit below with regard to yield, but certainly not a disaster. Spring wheat alone could not pull world grain higher, and so the market finally broke back.”     

Steve Freed, vice-president, ADM Investor Services, Chicago, Illinois, U.S., said farmers in the past month were heavy sellers not only of the wheat they were harvesting but also were forward selling some of the wheat they planned to harvest in 2018.

Steve Freed, vice-president, ADM Investor Services.

“There is a growing consensus that next year could see an increase in wheat acres, which may have encouraged some of the forward sales,” Freed said.

Such forward selling may be unusual for the date, but in areas where growers don’t see a lot of precipitation and given the drop in corn prices, “wheat may be back in the mix,” he added.

Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services.

Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, commented while the U.S. and Canadian spring wheat crops will be lot smaller than initial expectations, they will not be as small as some private forecasts suggested.

Another reason for the futures drop was the effect the June rally had on U.S. export prices, Meyers said. U.S. export wheat prices in many markets weren’t competitive even before the rally. The rally significantly widened the spread between U.S. wheat offers and those made by other wheat exporters, and it was clear U.S. wheat exports would tail off if the spread wasn’t narrowed.

Meyers pointed to a related factor, “Some countries are expected to have better crops than initially forecast, namely Russia and France. Russia is always one of the low-cost sellers, so if they have a large crop, they tend to move it into the world market quickly and at aggressive prices.”

The analysts differed in expectations for wheat futures direction in the next few weeks, but no one suggested a dramatic change.

“Wheat is going to track lower, pulled down by corn,” Beeson said. “Corn has passed through its critical stages by this point. Corn yields may be a little below trend, but it’s not going to be a disaster. December corn at $3.90 a bushel is probably too high, so we think corn prices are going to slide and pull other grains along.”

Meyers said, “I think from these levels, given the big selloff we’ve had, wheat futures may move mostly sideways during the next several weeks. Prices have more or less aligned with where world and U.S. wheat supply and demand is. I think K.C. wheat around $4.90 a bushel, Chicago at about $4.85 and spring wheat futures around $7.35 are probably what you’d expect given a carryover that is going to decline in the United States but with world wheat stocks remaining large.”

Meyers said there was a possibility the corn crop could turn out to be a little larger than expected given recent and forecast favorable weather across most key regions. December corn futures could drop to $3.50 to $3.55 a bushel (from around $3.84 on Aug. 8), and November soybeans could get down to $9.35 a bushel (around $9.73 on Aug. 8), he said.

“We could see a little pressure on wheat futures,” Meyers noted. “But I don’t see a significant drop in wheat prices because pressure from corn and soybeans would be offset by the U.S. carryover of wheat turning out to be less than initially projected.”

Freed said with Chicago December wheat at around $4.80 a bushel, many traders were not willing to go short. He said some fund managers thought the U.S. might gain a little more export demand because of some issues in Europe, such as low quality in Germany and Poland. The Canada crop was struggling, and Western Australia was dry.

“So there are some people who have suggested U.S. wheat exports in 2017-18 may be closer to 1,025 million bushels than the 975 million bushels forecast by the USDA in July,” Freed said. “I think the funds may be saying if there is a little more weakness in the nearby, they might step up to the plate and start nibbling at wheat from a supply standpoint.”

The discussion with the market analysts turned to approaches to spring wheat coverage, futures and basis, in the next several weeks.

“In Minneapolis wheat futures, a lot of people already have coverage into the middle of 2018,“ Freed said. “Their question is should they extend coverage further if Minneapolis futures hold near $7 a bushel, and my answer is probably no. This year’s rally began at around $6, and if we have normal crops next year, we may go back to that level.”

Beeson said, “Our spring wheat buyers are pretty much covered through the calendar year (in spring wheat futures). We would not be adding coverage beyond that at this point. For those who have shorter coverage, I’d take advantage of the break we’ve had to cover futures through the end of the year.“

Meyers indicated he thought Minneapolis September and December wheat futures were at good levels to cover futures through December. There might be advantage to adding some coverage into the first quarter of 2018, but bakers should refrain from covering futures into the second quarter.

“To me, there’s a lot more downside risk in the second and third quarters of 2018,” he said.

Meyers said there was a good chance that spring wheat futures in the second quarter of 2018 may be 50c or 60c below where they are today. This was because the grower response to this year’s high prices probably will be to plant more spring wheat next year, perhaps 10% to 15% more spring wheat than in 2016.

At the end of March, the market will know producers’ planting intentions for 2018. Larger spring wheat plantings and normal weather would result in a larger crop. The market already begins to look forward to the harvest by the second quarter, Meyers said.

“What I’ve seen over the years is that you don’t want to get too aggressive in wheat in the quarter before new crop,” he said.

Both Freed and Meyers suggested a more active approach to covering spring wheat basis even through the end of the current crop year.

“While the spring wheat basis seems relatively high, it’s actually below the five-year average,” Freed observed. “I think current basis coverage is rather limited, so my suggestion is bakers add to basis coverage, especially in spring wheat, just in case it takes off after harvest. The spring wheat market is not in as much a carry as winter wheats are, so I would suggest buyers lock in the basis until next year’s new crop.”

Meyers said, “I’m not quite sure where some of the deferred basis quotes are for 14% protein. But my recommendation is if you can cover 14% protein at 110c or 115c over the future or lower, I’d be adding coverage.”

Meyers pointed out unlike futures for the second quarter, which he said he thought would drop because the market will begin looking to what’s coming up for the 2018 crop, with tight old crop supplies and futures dropping in the second quarter, it will be difficult if not impossible for the basis to weaken.

“If the market has to source 14%-protein wheat, and farmers are going to be encouraged to sell it when futures are going down, it’s more than likely going to be reflected in basis levels,” he said.

Like Freed, Meyers said spring wheat basis coverage through the current crop year might be in order.

Beeson had a less aggressive stance. He indicated they’ve been looking for first-quarter 2018 spring wheat basis coverage.

“But we’re not getting really attractive offers, so we’re not going beyond that,” he said. “If you can cover first-quarter basis at what fourth-quarter values are, you should do it, but we’re not finding such offers to be available.”

Turning to hard red winter wheat, Meyers suggested Kansas City futures coverage through December and into the first quarter of 2018. He said he’d hold back from covering the second quarter, expecting Kansas City futures may be lower then as the market looks forward to the 2018 crop. With regard to hard red winter wheat basis coverage, he said 90c to $1 over the K.C. future may be a good value for 12.6%-protein wheat to cover basis all the way through the crop year.

Freed pointed to the two-tier market for the 2017 hard red winter wheat crop because of its low average protein. With regard to K.C. futures and cash basis coverage, he noted many buyers have probably done as much as they can or want to do for a while given the relatively high basis for high-protein wheat.

Beeson said the basis break in Kansas City caught many by surprise.

“But we would not push basis out until we do futures,” he said. “We have the third-quarter basis covered but not beyond.”

Freed noted with regard to employing more hard red winter wheat-spring wheat blends this year to bring up flour protein levels, that most large baking companies already have decided on plans to get them through the crop year. For flour buyers, “you might just want to get through this year, because next year, prices may be lower,” he said.