Canada Markets

We need to start with a brief history lesson given how similar the current situation is to the past drought. A rally that began in August 2020 on strong demand due to a very unusual price discount for Minneapolis wheat resulted in a $5.96/bushel gain by November 2021 with the help of the drought of 2021. And that's not a misprint; the rally took prices from $4.90 to $10.86/bushel in 15 months.

Reviewing the spread action, Minneapolis wheat went from a very unusual discount of $.65/bushel to Chicago wheat (which encouraged greater-than-expected use of the former) to an unusually large premium of $2.84/bushel in just over a year. As you can see from the accompanying chart, the greatest gains were made in the six weeks from late May to early July thanks to developing drought in spring wheat areas at the time.

The other interesting similarity is found in the Commitments of Traders (COT) data. In August 2020, managed money traders were near record net-short levels for the time -- short 24,513 contracts or 123 million bushels (mb) of Minneapolis hard red spring wheat. By May 2021, they had contributed greatly to the rally by covering their short positions and reaching 16,415 contracts net-long.

On May 19, 2025, they set a record net short of 34,140 contracts or 171 mb -- just in time for drought conditions to worsen in the Canadian Prairies and western U.S. spring wheat areas. They did begin covering shorts following the surprisingly low initial crop ratings with more expected.

The first spring wheat crop rating of the year from USDA caught the market off guard when only 45% of the crop was in good to excellent condition, tying for the worst result since 1988's drought. The trade had estimated 71% ahead of release, resulting in a delayed reaction rally. The second update released on Monday did show an improvement to 50% good to excellent with conditions improving as you go from west to east; but still far below initial expectations of 71%.

The long-term forecast for June through August should be warm and fuzzy for no one with above-normal temperatures and much-below-normal precipitation expectations for the driest areas.

The Canadian Prairies are being compared to 2021 as well, and not for a good reason. With over 50% of the spring wheat area seeing half or less of average precipitation since April 1 and no widespread relief in sight, there is plenty of fodder for bulls should they decide to take it.

All of this sets the stage for a 2021-style increase in the premium for Minneapolis over Chicago values, but that doesn't diminish the importance of the potential for a rally in Chicago wheat itself.

There are numerous reasons to be bullish if anyone wants to pay attention -- escalating attacks between Ukraine and Russia with promises of retaliation from President Putin, increased disease concerns for soft red winter wheat amid excess rainfall, increased rainfall and flooding concerns for hard red winter wheat areas as harvest is beginning, drought concerns in Russia, the Black Sea area and China -- that sort of thing. But so far funds have chosen to ignore them and use any rally as a selling opportunity.

As of Friday's COT report, between Chicago and Kansas wheat markets, managed-money traders remained 180,587 contracts or a whopping 903 mb net-short. That was after they bought back 8,468 contracts during the week ended May 27. With such a large short position, quite a significant rally could result should a disorderly short-covering event take place. What the trigger will be is yet to be seen, but given their tendency to be momentum-driven and trend-following in nature, technical signs of a bottom may be the ultimate inspiration.

With that in mind, the divergence bottom formations left in both Chicago and Kansas wheat are a good start. Prices broke into new lows in early May, but the RSI (relative strength index) did not. That suggests greater internal strength than the price action would imply. Initial short-covering by funds resulted from the lack of additional selling on the push into new contract lows, with that rally followed by a short pullback. The increase since has left inverted head-and-shoulders bottom formations on both exchanges. The measured move in July Chicago wheat would be $6.05/bushel on a rally over the neckline at the May 21 high of $5.5625/bushel.

All of this does nothing to guarantee higher prices, but the most important takeaway should be the potential that exists for a rally should traders decide to buy in (pardon the pun). Not only is that important for setting targets for a marketing strategy, but it also comes into play for risk management purposes. Being oversold and coming up short of new-crop production could be expensive if we see a repeat of 2021.

On a closing note, it is worth a reminder that the Minneapolis Grain Exchange became a subsidiary of Miami International Holdings (MIAX) after the two companies merged in 2020. Expect that to impact how quotes are delivered and by whom. See more in Mary Kennedy's post on the developments at https://www.dtnpf.com/…).

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I welcome feedback along with any suggestions for future blogs. My daily comments can be found in Plains, Prairies Opening Comments and Plains, Prairies Quick Takes on DTN products.

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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