Todd's Take

There is nothing like a drought to make a grain market bullish, and in 2017, we saw a good example of that in spring wheat after much of Montana and the Dakotas were hit with severe to exceptional drought conditions. From mid-May to early July, the new-crop contract of September Minneapolis wheat jumped over three dollars a bushel, from $5.44 1/2 to $8.68 1/2 as dry weather attracted noncommercial traders into the long side of Minneapolis wheat futures.

As I mentioned in the July 5 column on this topic, "When Prices Go Vertical" (https://bit.ly/…), prices often go higher than they otherwise would when drought scares away the sell side of the market. The result is a powerfully bullish, yet unstable, market environment that eventually wears out and traps bullish traders that came late to the party. The hook of the surprise happens when the bearish turn comes before the drought shows signs of improving.

When prices are falling, but drought is still in play, as it was after the early July peak in 2017, speculators get caught in the confusion and hold on to their long positions for longer than they normally would. In 2017, the hope for a second rally went unquenched, resulting in a long, painful liquidation of trader positions. Like Humpty Dumpty, once the upward price momentum breaks, it is difficult to put the pieces back together again. The eventual noncommercial liquidation fueled a 38-week bear trend and took September Minneapolis wheat prices down 32% from the July peak.

The final drop in the 38th week came as USDA estimated spring wheat plantings at 12.6 million acres (ma) in 2018, more than expected and up from 11.0 ma in 2017. As we often discuss, early planting estimates can be tricky, and that is what markets were reminded of again in the first week of April.

On Monday, September Minneapolis wheat slipped another 4 3/4 cents lower, but by the end of the week, prices had gained 29 1/2 cents after another winter storm crossed the Northern Plains. Forecasts change, but below-average temperatures are currently expected to stay in the Northern Plains through April, not leaving a very wide planting window for spring wheat in May.

With final planting dates likely in late May or early June, the clock is ticking, and it is becoming increasingly possible that part of USDA's 12.6 ma estimate may be replaced by another crop in 2018. Technically, September Minneapolis wheat posted an outside bullish weekly reversal on Friday, which suggests an end to the bear trend and higher prices ahead.

Noncommercial traders have been bullish for 11 consecutive months, but Friday's CFTC data showed them long by only 1,581 contracts -- a roughly neutral position as the drought hangover almost vanished. Fundamentally, planting problems don't normally generate as much bullishness as a drought, but it all comes down to severity, which means that weather will have the final say. By the way, there still are areas of moderate to severe drought clinging to the western Dakotas, which are drier than the region showed a year ago, but much improved from last summer.

On the demand side, U.S. exports of spring wheat are down 28% from a year ago as world competition remains fierce. As of Monday, the new-crop futures spread indicated a neutral commercial outlook for spring wheat. The September contract was priced 9 1/4 cents below the December, a slightly narrower carry than the spread showed a year ago, before drought became a larger issue.

Just as USDA's planting estimate was too early on March 29, it is still too early to be confident of where spring wheat prices are headed in 2018. Last week's bullish reversal however, looks a lot like the end of a bear trend for now.

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

Follow him on Twitter @ToddHultman1

(CZ/BAS)

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