Todd's Take

For hard red winter (HRW) wheat prices, 2019 was largely a bearish year, weighed down by expectations for record global wheat production of 28.07 billion bushels (bb) (764 million metric tons) and record world ending wheat stocks of 10.58 bb (288 mmt) that ruled the latter half of the year and remains unchallenged in the final months of 2019-20.

The only real threat of a bullish move happened in May and early June when it became apparent that row-crop planting was becoming increasing difficult with each passing day of the calendar. The soft red winter (SRW) wheat crop did suffer excess moisture in 2019, but for a crop that only amounted to 1% of world production in 2018-19, it was difficult to see much bullish influence for HRW wheat from the adverse situation in SRW wheat.

Spot Kansas City wheat, the futures contract for HRW wheat, flirted with higher prices for most of June, but then finally gave up and closed lower on June 28. For DTN Six Factors Market Strategies, I was itching to make winter wheat sales at June's higher prices, but harvest was running behind its usual pace and only 15% of the winter wheat crop was harvested by June 23.

Wheat is one crop that I don't like to recommend making sales before the crop is in, as a lot can go wrong at harvest time, and that was certainly a risk in 2019. It was tough to miss making sales in June as DTN's National HRW Wheat Index proceeded to drop to new lows in August, reaching a two-year low of $3.50 on Sept. 3.

Not only was global wheat production going well in late 2019, but speculators and futures funds were getting more confident about the short side of the market, adding to net-short positions. I am inherently distrustful of speculative positions, but had to admit there was nothing bullish to say about wheat prices at the time.

It's not pleasant sitting on 100% of the year's wheat production when prices are making new lows. Even so, I knew from past behavior that there would likely be opportunities for price rotation in the winter. Prior research shows spot grain prices reach three-month highs nearly every year. Six-month highs are not certain but are a likely bet, even in bearish years.

Given the bearishness of wheat's situation, the tendency of prices to rotate against the trend, and in this case, against some heavy bearish fundamentals, was enough to grant us better selling opportunities.

On Dec. 17, 2019, DTN Market Strategies made its first recommendation for 2019 HRW wheat production, taking advantage of an 87-cent rally from the Sept. 3 low to urge a sale of 50% of production. DTN's National HRW Wheat Index was at $4.37 at the time, a five-month high and near where prices had traded the previous June.

At the time of the first sale, noncommercials had covered their bearish bets and were a little net long, but futures funds remained lightly net short. Fundamentals hadn't changed much, but there was suspicion Russia's wheat production may have been overstated.

Patience paid off for the sale of the second half of 2019 production. On Jan. 15, May wheat futures came within a whisker of reaching a new six-month high. The sell recommendation was issued with DTN's National HRW Wheat Index at $4.71, over $1.20 above the September low and within 3 cents of the high of the move.

The average cash sale price of $4.54 a bushel for all 2019 production was not stellar for HRW wheat, by any means. However, given the post-harvest range of $3.50 to $4.74, the average achieved the 84th percentile -- not a bad performance.

Since then, May KC wheat futures have dropped 65 cents from the January high to Thursday's close of $4.46 1/4. DTN's National HRW Wheat Index settled Thursday at $4.22.

Wheat's fundamentals remain as bearish as they were in the fall of 2019, and looking ahead to 2020, early expectations are for another world record crop. It is early in the year and there is plenty of uncertainty ahead. Whatever arises, you can be sure we'll be using all six factors again to recommend the highest selling price we can.

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

Follow him on Twitter @ToddHultman

(BE/BAS)

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