DTN's wheat strategy subscribers received alerts this week. Without revealing too much information, readers were pointed to DTN's National Soft Red Winter Wheat Index, which is near its highest level in four years, while DTN's National Spring Wheat Index is near its highest level in eight months.
If we look to the March MGEX spring wheat contract, we see that Monday's double-digit move higher of 17 1/4 cents was followed by a 6 1/2-cent gain on Tuesday, while Wednesday's close resulted in a modest loss of 1/4 cent. The sudden move higher seems to be stalling, with the daily closes over the first three days of this week falling within a narrow 1 3/4-cent range.
The most recent CFTC data shows noncommercial traders reducing their bearish net-short position slightly in spring wheat futures for the week ending Dec. 10, the first time this bearish position has been pared in five weeks, although at a net-short futures position of 16,749 contracts, remains relatively close to the record bearish position of 18,673 contacts net-short reported for the week of Sept. 10. DTN often views large speculative net-short positions as a potential supportive feature for markets, as a sudden change in sentiment can lead to a sharp, short-term move higher.
This week's alert coincided with a customer conversation noting that prairie spring wheat prices have failed to keep pace, noting a belief that grain handling margins on the Prairies may be excessively high at the moment.
The attached chart compares the trend in No. 1 CWRS 13.5% protein cash bids for 2019 for southwest Saskatchewan (brown line) and southeast Saskatchewan (blue line), as reported by PDQinfo.ca. The two bids have tracked closely over the year. The black line represents DTN's National Spring Wheat Index, converted to Canadian dollars/metric ton using the spot Canadian dollar and ProphetX. It is important to note that DTN's index does not refer to a specific quality or protein level, but rather, is comprised of whatever data is reported daily by grain handlers.
From Jan. 1 through July 31 of this year, the southwest Saskatchewan bids trailed the DTN spring wheat index by a range from $2/mt reached in January to a high of $12.14/mt reached in March, averaging $6.95/mt. When southeast Saskatchewan bids are considered for this period, prices range from a low of $8/mt below DTN's spring wheat index, reached in May, to a high of $17.84/mt, also reached in March, while averaging $12.54/mt.
As can be seen on the attached chart, this relationship has changed in late September. Since Sept. 15, this spread has widened to as much as $30.42/mt in southwest Saskatchewan and $33.49/mt for the southeast. On Dec. 17, this was calculated at $28.64/mt for the southwest and $33.02/mt for the southeast. PDQ data over the past four years, compared to DTN's National Spring Wheat Index result in an average spread of $17.17/mt for southwest Saskatchewan and $22.91/mt for the southeast on this date.
As a result, since mid-September, the southeast Saskatchewan bid has advanced 8.8%, the southeast bid by 8.1% while DTN's National Spring Wheat Index has risen by 17%.
There are likely a number of reasons behind the current spread. The late harvest and concerns surrounding quality likely kept traders sitting on their hands and afraid to push export sales too hard given the risks. The recent CN strike has likely played a role, as has consolidation the grain handling network with Parrish and Heimbecker acquiring 10 Louis Dreyfus facilities, reducing competition on the Prairies.
Movement of wheat bears watching in the weeks ahead. The week 19 vessel lineup remains above average on the West Coast, following 456,100 mt of wheat shipped in week 18, the largest weekly volume shipped this crop year. Commercial stocks of wheat reported for week 18 are down 13% in from the same week in 2018, while 6.7% below the three-year average. Terminal stocks as a whole are down 25.8% from the same week in 2018 and 24.8% below the three-year average for this week.
While the futures market may not have much or any upside potential ahead, it is of value to consider the current spread between the Prairies and Northern Plains; buyers may be forced to do better.
Cliff Jamieson can be reached at email@example.com
Follow him on Twitter @CliffJamieson
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