Inside The Market

Wheat Defies the Odds

Much of the focus of this year’s unusually wet spring weather has been on corn and the impact it will have on reducing ending corn stocks and raising prices in 2019–20, but another bullish aspect of spring took place in U.S. soft red winter (SRW) wheat.

SRW wheat is grown throughout the southeastern U.S., with the highest production areas along the Mississippi Delta, and across the eastern Midwest. This spring, those happened to be two of the wettest regions, taking on rain and more rain. USDA’s Crop Progress reports for winter wheat consistently showed the highest poor-to-very poor crop ratings in SRW wheat states from Missouri to Ohio, and in Michigan.

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As a result, USDA estimated the U.S. SRW wheat crop at 258 million bushels (mb) in June, the smallest since 2010. September Chicago wheat prices started climbing in mid-May and significantly outpaced September Kansas City prices by late June, reaching a high of $5.57 1/4 on June 27. The June 27 high represents a 14% premium over KC wheat, the highest such premium since 1979.

Cash bids in southern Illinois and in parts of Indiana have seen quotes above the futures board at times, a rare indication of strong demand for reduced available supplies.

LARGER VIEW

If the world of wheat didn’t extend beyond U.S. borders, we could end the story here and applaud SRW wheat’s higher prices in 2019, but the larger view of wheat is not so bullish and that makes the early summer rally in SRW wheat prices suspect.

USDA’s estimates from June, show the world is expected to grow and harvest a record high 28.7 bb (780.8 mmt) of wheat in 2019, up nearly 7% from 2018. World ending wheat stocks are also expected to achieve a record high 10.8 bb (294.3 mmt). If those estimates turn out correct, Russia will likely be the dominant wheat exporter again in 2019–20.

The conflict between the bullish scenario in U.S. SRW wheat and the world wheat market at large is not good news for SRW wheat prices moving forward. Adverse weather could become a more prominent factor in 2019, but as this is being written, threats to the world’s new wheat crop are few.

Most likely the bearishness of abundant world wheat supplies will win out and keep overall wheat prices low. Local cash prices for SRW wheat may maintain decent levels in the eastern Midwest, but chances for extending the rally beyond June’s high look slim. In cases where SRW wheat isn’t specifically needed, the market will find cheaper available substitutes.

As rough as crop conditions were in the spring of 2019, it was nice to see that a cash U.S. wheat price could still trade near its four-year high without help from the world market. Imagine what prices could do with a little outside help?

> Read Todd’s blog at about.dtnpf.com/markets.

> You may email Todd at todd.hultman@dtn.com, or call 402-255-8489.

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