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Drought, freeze, Ukraine equals volatile wheat prices

Drought, freeze, Ukraine equals volatile wheat prices

Given tight stocks, freeze damage, drought conditions, and political uncertainty in the Ukraine, wheat prices should remain relatively strong through June and into July.

Below freezing temperatures is the most recent event expected to reduce hard red winter (HRW) wheat production. Drought conditions in most of the HRW wheat production area, however, may be the most significant event affecting production and price.  Political conditions in the Ukraine may be the event that, at any time, could come into play. All three events may be having a positive impact on wheat prices.

As with most freezes, it may be weeks, a month, or even harvest before the freeze impact is known. It is a fact that drought conditions have a tendency to increase the negative impact of freezing temperatures on wheat. The day of the freeze and the day after, the KC July Wheat contract price increased from $7.26 to $7.71, a 45-cent improvement. Contract prices held within 6 cents of the $7.71 close for the remainder of the week.

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Intensifying drought conditions in much of the HRW wheat production area started affecting KC wheat contract prices January30, 2014. Between January 30 and February 25, KC July wheat contract prices had increased from $6 to $6.86. The KC July wheat price fell to $6.60, just before Russia invaded Crimea.

After the invasion and with the drought increasing in intensity, wheat prices increased from $6.60 to $7.94. Some analysts indicate that the major event resulting in higher prices was the drought. Russia’s invasion of Crimea and the continued potential of an invasion of Ukraine continue to be market news.

At this writing, the KC July wheat contract price is $7.65.  The July contract is trading in a price range between about $7.23 and $7.80. Closes below $7.23 would indicate a price target of $7. Closes above $7.80 would indicate a price run up to near $8.

The HRW wheat harvest will begin in northern Texas and southern Oklahoma in about five weeks. Compared to normal (average), yields are expected to be relatively low in these areas. The potential for average yields will not be reached until the harvest enters central to northern Oklahoma and southern Kansas.

In Kansas, Oklahoma and the Texas panhandle drought conditions are expected to result is relatively low yields and zero yields over much of these areas.

The point is that wheat production in northern Texas, southern Oklahoma, and the Texas Panhandle will not be sufficient to “fill the market pipeline.” The wheat harvest will need to be into Kansas before pent-up wheat demand is met and wheat prices put in a position to decline.

This does not mean that the KC July wheat price won’t decline back down to the $6.80 level. It means that, even with good moisture and cool weather, the KC July wheat contract price is not expected to decline down to the $6 level. The freeze and drought have probably made a permanent impact on wheat prices.

The positive price impact of the freeze is probably complete. The impact of Russia invading Ukraine and/or the impact of political unrest in Ukraine may be limited, but the impact on wheat prices may last throughout the 2014/15 wheat marketing year.

Moisture, temperature, and drought conditions are the major factors that will influence wheat prices. Weather markets are always volatile and create both production and price risk.

A method for dealing with uncertain production and volatile prices is to use written mechanical strategies. Written strategies take emotion out of the decision process and increase the odds of success.

April freeze puts wheat in jeopardy

Given tight stocks, freeze damage, drought conditions, and political uncertainty in the Ukraine, wheat prices should remain relatively strong through June and into July. Prices during August and beyond will be determined by foreign wheat production.


Also of interest:

2014/15 wheat marketing-year stocks remain tight

Four words explain $1 wheat price increase

WASDE predicts higher corn exports

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