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Wheat Outlook - Focus on old crop wheat

Good basis, narrow carry suggests action

On paper, at least, the wheat market looks like it has room to run into 2020. But farmers still holding old crop winter wheat inventory should take a hard look at moving on anyway over the next few weeks, at least with the cash portion of their price.

Once-large carries have evaporated as the crop remains mostly in the strong hands of hedgers. Basis has strengthened, especially for soft red winter wheat, where cash remains above option in many areas. Hard red winter wheat is also running at average to better levels despite large inventories of that class following good yields.

Coaxing basis gains from the market after December delivery can be a dicey proposition, especially without carry as an incentive. The market’s inability to hold gains from Tuesday’s brief spurt of short covering is an indication of headwinds futures face, despite an outlook that’s slowly improving.

It’s possible all-wheat acreage could fall even below this year’s record low due to poor profitability. That should limit production and supplies left over at the end of the marketing year May 31 should be lower too. USDA cut its estimate of spring wheat production by 42 million bushels after resurveying growers still harvesting when the agency did its last survey for the small grains summary in September.

Spring wheat has a little more carry to sell. But that market is all about protein. Premiums have been volatile recently, but futures are still ebbing lower. As with winter wheat, selling into a good cash market may be the best choice.

Buying calls to own that inventory on paper won’t come cheap. Volatility is relatively high in wheat compared to corn and soybeans and getting calls to pay off will incur a lot of time value. Rallies could come if the January winter wheat seedings tally is a lot smaller than expected, but typically moves don’t gain enough traction for calls to pay off until growing season weather becomes an issue as fields come out of dormancy.

Harsh winter or spring wheat in the northern hemisphere could change the dynamic, but losses in the Black Sea region will be needed to trigger gains in export demand. Sales aren’t bad and may even wind up a little better than USDA forecasts. But end users aren’t nervous about finding supplies in a world that still has plenty of wheat.

The one major crop failure this year again is Australia, which is suffering its third drought year in a row even though El Nino is over. Bushfires are the issue now, and the disaster has opened up the market for U.S. white wheat, which enjoyed a surge recently off the PNW.

Hard red winter wheat continues to trade at a discount to SRW for both old crop and new. That suggests cross-hedging as a possibility for HRW growers who can trade futures. July SRW on average shows its cards in December. A move above $5.50 would indicate the market could have some legs.

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With normal yields and expected acreage carryout could continue to tighten in 2020, but big rallies depend on renewed export demand.

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USDA cut 42 million bushels off its estimate of spring wheat growers after resurveying growers, with the biggest change in acreage coming in North Dakota after snow flattened fields.

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Precipitation remains below normal in Ukraine and South Russia which could limit acreage a little.

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December on average brings a turning point for new crop futures, which either make new highs or new lows to establish their trend into spring.

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:

Corn Outlook

Soybean Outlook

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.

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