Canada Markets

HRW Wheat Spreads Show Growing Concern

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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This is a chart of the Kansas City hard red winter futures spreads. The black line represents the July/September spread, while the blue line represents the September/December spread. Both have shown recent strength, or decreasing carry, pointing to growing concern about the crop. (DTN graphic by Nick Scalise)

Bloomberg news service released a report today titled Wheat Crop Seen near Record as U.S. Drought Recedes. In it, they present statistics from The United Nations Food and Agriculture Organization, who released reports last week suggesting that world wheat production will increase 4.3% in 2013/14 to 690 million metric tonnes, just around 10 mmt shy of the all-time high reached two years ago. Ending stocks are forecast to be 176 mmt, or 2 mmt higher than the current year's forecast.

Perhaps it all makes sense? High prices cures high prices as they say, as this past year's price action will undoubtedly lead to expanded acres around the globe, many of which are forecast to generate higher yields due to a return to more normal growing conditions. This could perhaps be viewed as a bearish situation.

At the same time, wheat spreads, such as the Kansas City hard red winter spreads attached, are perhaps telling a different story. The July/September spread (black line) has trended lower from its high last November of minus 1/4 cent (not shown) to a February low of minus 14 3/4 cents. This is a carry market, with the September trading above the July. From its February low, the spread has strengthened 3 1/4 cents to today's close of minus 11 1/4 cents, including a 1 1/2 cent increase today alone.

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The September/December spread is showing the same activity, as seen on the blue line on the attached chart. The November high was minus 3 3/4 cents (not shown), which has ratcheted lower to a low in February of minus 18 3/4 cents, only to strengthen by 3 3/4 cents to minus 15 cents, including a 2-cent climb in today's market. The logic is that as commercial traders become more bullish, their actions indicate their need for product sooner than later, which pushes the nearby contracts higher in relation to the more distant contract.

Hard red winter is an excellent proxy for the entire wheat market because it not only makes up the bulk of the total United States wheat acreage, but also because it is the crop which is in the most distress and will be most affected should the dry weather continue.

While there has been some improvements to the drought maps in the U.S., the most recent NOAA (National Oceanic and Atmospheric Administration) data, dated March 7 to May 31, clearly shows a situation of "Persistence" across the Southern plains where the HRW wheat is grown. In a recent blog, DTN Senior Ag Meteorologist Bryce Anderson stated the most recent NOAA comments made regarding the Southern Plains:

"Additionally, the three-month (forecast) favors below median precipitation across roughly the southwest half of the extreme to exceptional area. There are equal chances for wetness or dryness in the rest of the area."

While both Chicago and Minneapolis futures are also showing a gradual firming in new-crop spreads, the HRW wheat future should appear as the most responsive to the lingering weather concerns.

While there will be many headlines trying to clarify the situation and its impacts as we move ahead, simple spread charts can tell a story about how the real situation is being interpreted by those who have a vested interest in the physical commodity itself.

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

(AG)

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