With the 2018 marketing yet set to end May 31, there’s a whole new set of numbers to watch as the wheat trade turns its focus squarely to new crop. USDA May 8 issued its first monthly estimates of 2019 production, supply and demand for the U.S. and the world, and also released its first survey-based estimate of winter wheat production.
Nothing overall was very bullish for wheat but the market rebounded anyway, trading weather and buoyancy from corn that produced short covering from big speculators who were still bearish.
For growers wonder what to do with a market still bleeding red ink, here’s the number to consider: carry. As I commented recently, carry is the only game in town and that’s still true. Now it could offer some utility even for farmers who can’t hedge it for long-term storage returns.
The spread between July 2019 and May 202 SRW futures traded out to 54 cents at the end of April, or almost 5.5 cents. It looks set to close the week around 37 cents. The spread for HRW went from around 73 to around 66 cents.
For those with storage wondering whether to get some price protection on before harvest, May 2020 SRW is one way to sell $5 wheat. For HRW the May is around $4.85. Neither price is great but it’s in or near the projected selling range from my forecasting model this week. The same is true for Minneapolis July 2020, which is around $5.80.
Those who want to get something priced for the inventory headed to storage can start here. But the spreads can be used other ways to.
The relatively smaller SRW carry comes from production estimates for that class that show stocks tightening. HRW carryout could also be tighter than the trade anticipates if production turns out smaller than expected. That has a chance to happen if it keeps raining as much as forecast.
A May-July SRW spread that tightens back to 28 provides opportunities for growers to bear spread, selling July and buying May. If the crop is good, the spread should widen back out to provide carry, with gains used to offset what is likely to be weak basis at harvest.
Still, even smaller U.S. crops might not do much for prices if world production stands up. Crops from Europe to the Black Sea are looking better than a year ago, when they still provided plenty of competition in key markets like Egypt. Australia is turning hot and dry, but forecasters there maintain better conditions are ahead for the continent as El Nino eases. Argentina is also a little dry as growers there get ready to start seeding their next crop. As a result, global supplies still look more than adequate to meet demand.
Until that dynamic, rallies should be used to sell, especially for those who can’t store wheat into the fall.
Carryout in the year ahead for wheat may not be quite as bearish as USDA forecasts but it’s hard to argue with lower prices in a world with plenty of wheat.
My first class-by-class forecast for the 2019 marketing year shows soft red and white wheat stocks tightening, which could affect spreads for SRW. USDA won’t put out a new crop class forecast until July.
Seasonal trend for July winter wheat futures are clearly in bearish downtrends. History shows it’s very hard for prices to rally in these markets until after harvest.
Carry spreads for winter wheat are a good barometer of where the market is at.
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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.