Todd's Take

As the 2017-18 winter wheat season comes to a close in nine days, the price of spot Chicago wheat is on track to finish with an 18% gain. That isn't bad for a year in which USDA says the ending stocks-to-use ratios were 53% for the United States and 36% for world wheat, both at their highest levels in more than three decades.

More recently, spot prices rallied from their December low of $3.86 1/2 to Monday's close of $5.07 1/4, thanks largely to drought in the southwestern U.S. Plains. On May 10, USDA said the new winter wheat crop will drop from 1.27 billion bushels (bb) in 2017 to 1.19 bb this year, a number that will keep changing after this summer's harvest.

If wheat were primarily a U.S. crop, the factors above could give us a more bullish scenario, but that is not the case. USDA's May estimates expects U.S. winter wheat to account for 4% of world wheat production in 2018-19, an important influence that often gets outvoted by the world's other wheat regions.

The latest five-month rally caught the market at a time when the rest of the world's wheat was dormant, but that is no longer the case in the final third of May. So far, dry conditions are an early concern in Australia, but winter wheat crops in Europe, Ukraine and southern Russia are doing well. Winter wheat in China was dry for a while, but has recently been helped from increased rain.

As the situation currently stands, it is difficult to make a case for higher wheat prices, but the new year is still young. It is understandable if traders are cautious about going short until more is known about the new season, and that hesitant attitude is likely giving wheat prices room to hold their gains.

In fact, CFTC data shows noncommercial traders have been on the long side of the Chicago wheat market for three weeks as of May 15, an unusual and not necessarily bullish indicator for wheat prices. On May 7, I did a DTN Closing Market Comment video with Senior Ag Meteorologist Bryce Anderson, which showed that noncommercial net-longs marked peaks in wheat prices the most recent five consecutive times.

With spot Chicago wheat trading shy of its 2017 high at $5.53 1/2, we have to wonder if this will be the sixth consecutive time that noncommercials turned bullish at the wrong time. Technically, we have to respect that the trend in Chicago wheat is currently up, but a close below the three-month low of $4.59, if it happened, would mark a bearish change and put pressure on traders to liquidate.

Fundamentally, competition from the world's other wheat producers has been so tough that U.S. exports are down 14% from the previous year. USDA's latest estimate, which showed ending stocks of U.S. wheat dropping from 1.07 bb in 2017-18 to 955 million bushels in 2018-19, is not offering much bullish hope. Once again, weather is the wildcard in 2018 and noncommercials will need help from regions outside of North America to see their bullish bets pay off.

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

Follow him on Twitter: www.twitter.com/ToddHultman1

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