Todd's Take

Just over a year ago, much of the Midwest was under water and row crops were being planted much later than usual. Many of us were wondering how corn supplies would hold up with record prevented plantings being anticipated. Much to our surprise, corn got planted and 13 million acres of soybeans were sacrificed.

The other consequence of that wet spring and early summer period was that soft red winter (SRW) wheat production took a hit, dropping from 286 million bushels (mb) the previous year to 239 mb in 2019. At first, it wasn't clear how SRW wheat prices would respond to the lower supply total, as world wheat was on track for, and eventually achieved, a record crop. DTN's national index of cash SRW wheat prices slid lower in July and August, reaching a low of $4.43 on Sept. 3, 2019.

As DTN Contributing Analyst Tregg Cronin later explained in a Jan. 20 article, "Wheat Is the Word," (https://www.dtnpf.com/…) not all wheat is created equal. SRW wheat, in particular, has favorable qualities for crackers and pastries that end users were willing to pay up for. In fact, Cronin explained, the market paid 130 cents over the March futures contract last winter when USDA was estimating ending SRW wheat supplies at 106 mb.

Just last Friday, July 10, USDA opened the bidding for 2020-21 with an ending SRW wheat supply estimate of 103 mb, setting the stage for another year of tight supplies and higher Chicago wheat prices. USDA expects harvested acres to be up slightly from a year ago, but 280 mb of expected SRW wheat production will fall short of 292 mb of total use, leaving the lowest ending SRW wheat surplus since 2007-08 when cash SRW wheat prices peaked at $11.86 a bushel and finished the season at $6.13.

Similar to last year, the larger outlook for wheat prices in general remains bearish with both the International Grains Council and USDA estimating record world wheat production in 2020-21. It also doesn't help wheat prices that USDA is expecting a 2.65 billion-bushel (bb) U.S. corn surplus at the end of 2020-21 -- and DTN's National Corn Index of cash prices is already near $3.00.

In this bearish macro/bullish micro type of wheat market environment, trading in Chicago wheat futures was choppy at times last year, and that will probably be true again this year. However, the underlying bullish support for spot Chicago prices should hold firm, given the lean supply situation in SRW wheat USDA expects.

From a technical perspective, $6.00 has served as firm resistance in spot Chicago wheat for over five years. Last season, the peak came on Jan. 22, 2020, as the spot price traded within 8 cents of the $6.00 lid. There are other variables at work this season, including coronavirus, but I also expect the peak to come early in winter, after production in the Northern Hemisphere has gone dormant and users are scrambling for limited supplies.

September Chicago wheat got a big 24-cent boost Wednesday, triggered by a rumored sale of SRW wheat to China. The rumor has not yet been confirmed, but the match was lit and funds that increased net-short positions in late June, when prices fell below $5.00, found themselves quickly scrambling for cover as prices rallied to $5.50 3/4, the highest close in over two months.

We shouldn't be surprised by Chicago wheat's 15 1/2-cent drop on Thursday, and more volatile trading will likely follow as traders try to grasp record world wheat supplies on one hand versus limited supplies of U.S. SRW wheat on the other. It is also helpful to note USDA's estimate of U.S. ending hard red winter (HRW) wheat stocks is 423 mb, nearly 100 mb less than SRW wheat traded against a year ago.

There are no guarantees, of course, but this will be the second consecutive year of tight SRW wheat supplies, and end users will remember the difficulty of paying up to secure supplies last year. We can't get too bullish knowing a world record wheat harvest is probably on the way, but a $6.00 price target for spot Chicago wheat looks reasonable for 2020-21.

In a year when most U.S. crops are dealing with several years of cumulative surplus and coronavirus has shaken confidence in new-crop demand estimates, it is refreshing and a bit surprising to find a lonely bull in SRW wheat.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

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