Canada Markets

Yesterday's blog looked at the weak market action which has taken wheat futures to below seven-month lows in recent sessions, with all three wheat markets giving up a big percentage of the gains achieved since the market rally began in May. While wheat exports from the United States have been lackluster, spill-over pressure from recent selling in the soybean pit has also contributed to the down-side move.

When it comes to the wheat markets, the elephant in the room is the ongoing drought in the hard red winter wheat growing areas of the U.S. and the potential impact this may have to the overall wheat market. In 2012/13, production for the hard red spring class accounted for 44% of the forecast 2.269 billion bushel (61.8 million metric tonnes) of total U.S. wheat production. While recent moisture has perhaps taken the edge off of concerns, a great deal of moisture will be required to fully recharge soils.

One indication of the concern being currently expressed in the marketplace is seen in the price spread between the new-crop July Kansas City hard red winter wheat future and the July soft red winter wheat future. Historically, the spread between these two classes of wheat are determined by production, global demand and quality. Concerns over damage to the HRW crop is pushing red winter wheat futures higher in relation to Chicago soft wheat, as seen on the attached chart. The spread between the two futures, as seen on the attached chart of new-crop July 2013 futures, was 7 1/2 cents on May 11, around the time the wheat rally began last spring. The current spread is 55 cents, while trending higher. Should this trend continue, the blue trendline would indicate a move to 70 cents by the month of April, given the possibility of reduced production along with strong global demand due to crop shortfalls in competing export nations.

The most recent weather outlook, released by the Climate Prediction Centre Feb. 7, indicates drought conditions will persist over the entire hard red winter wheat growing area until April 30. Moisture received to date has calmed some nerves for the short term, although much more is required to recharge soil moisture levels. The National Weather Service is predicting above-average odds of moisture in both their six-to-10 day and eight-to-14-day forecasts for the Southern Plains.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

(ES/)

© Copyright 2013 DTN/The Progressive Farmer. All rights reserved.