It was high time for the wheat market to move and it finally did on Tuesday. But bearish logic remains unchanged for this market unless fundamentals of supply and demand change radically in coming weeks.
Make no mistake: The turnaround from contract lows is driven by short covering from funds that are bearish wheat. Big speculators pushed their net short position in HRW last week to its most extreme level in nearly three years and other classes aren't far behind.
But with less than 5% of winter wheat suffering from drought, it's hard to drum up support for rallies. The best argument may be that the crop is hurting from too much water, as excess water floods fields after a series of storms from the Plains through the Delta and Ohio River Valley over the winter.
Condition reports were sporadic this winter due to the government shutdown. But those finally coming out the past few weeks suggest the crop is in good shape. Of course, some fields are still covered in snow. Others could show signs of winterkill once temperatures warm up. But vegetation health index maps don't show huge problems so far.
The same is true for other major growing regions in the northern hemisphere, which is what really counts. Rains are improving conditions in Western Europe and the crop in the Black Sea region also appears to have escaped damage from cold. Wheat flowing out of the region should compete again with sales from the U.S. in key markets in the Mediterranean and Middle East. Asian buyers should also have more to choose from if production rebounds in Australia after a devastating drought. It's still dry down under but forecasts are for a turnaround in moisture once the El Nino warming of the equatorial Pacific fades in a coming months.
Plenty of wheat should be on hand when the new marketing year begins June 1. USDA raised its forecast of carryout March 8 citing weaker exports in a bump in imports. Feed usage may wind up a little higher than the government predicts, but not enough to make much of a difference.
Despite lower acreage for harvest this year, production looks on track to meet or beat last year's total. Assuming normal yields for the spring planted crop and what we know so far about winter heat, output could be around 1.9 billion bushels, plenty enough to meet demand. Ending stocks might tighten modestly, but still stick around 1 billion bushels or more, keeping average cash prices little changed from 2018.
Based on that scenario, futures targets are $1 or more above current levels. But selling price levels were already met on last summer's rally. Getting the market back likely will mean storage long-term into fall.
Growers with year-round markets can start taking a look at carry for storage hedges. HRW is already paying around six cents a month, enough to finance some out of the money call options to benefit if the market rallies enough. While that doesn’t seem likely now, futures typically get some type of bounce, at least to convince growers of seeding a crop for harvest in 2020.
For now, however, the trend in winter wheat is decided lower into harvest. Spring wheat could have longer to run but should struggle unless a small patch of dry conditions in North Dakota starts to expand.
It's hard to drum up much of a case for drought, with just 4% of the winter wheat crop in a drought area last week.
Winter wheat conditions should be decent when USDA begins updating crop progress nationwide April 1.
Wheat exports have picked up a little in the second half of the marketing year but it's likely too little too late to make a difference.
The trend in futures is lower, which suggests prices should continue their downtrend into harvest.
The base case for rallies comes from short covering by funds that held a bearish bet in hard red winter wheat last week that was near a three-year extreme.
Download a complete version of the outlook with extensive charts and analysis using the Download button at the end of this report.
More from Farm Futures:
Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Market Review on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat futures that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.