The drought conditions that have plagued the Southern Plains of the United States and its impact on the hard red winter wheat crop have long been a topic for discussion. The crop was rated at its lowest rating on record prior to going into dormancy last fall and if a lack of moisture wasn't enough, the crop was further beaten down by frost in certain areas.
As of July 7, the crop was rated as being 57% harvested, just slightly below the five-year average of 64%. The largest crop in the U.S. was rated as being 34% Good to Excellent, 24% Fair, and 42% Poor to Very Poor.
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Thursday's USDA report released the first breakdown of 2013/14 U.S. wheat by class data, reporting 2013/14 winter wheat production at 793 million bushels (21.6 mmt), which is 21% below last year's production estimate and 16.6% below the five-year average production.
Despite the fact that we're in the middle of the HRW harvest, basis levels remain firm as end-users and exporters fight to source their required supplies. As seen on the attached chart, the current cash basis, or discount from the nearby future, is around 20 cents under the September, which represents the strongest basis seen in the past five years, shown by the green line in the top-left corner of the chart. The average cash basis over the past five years, as shown by the purple line, appears to be closer to 80 cents under. Note that this basis is calculated using DTN's National HRW Index.
This chart highlights the fact that tighter-than-normal wheat stocks are also found to be in tight hands, while higher cash bids are required to do the job. Another sign of commercial interest in the crop is seen in the HRW futures spread. The September/December spread closed at a 15 3/4-cent carry on Friday, (December trading over the September) which has strengthened from the low of a 21 3/4-cent carry seen as recent as July 3. Resistance for this spread may be seen at the minus 14 1/2 cent level reached on June 21.
Time will tell whether this trend will continue although this is one trend that Canadian hard red winter wheat growers as well as Canada prairie spring wheat growers will be interested in following. A narrowing carry or even a move towards an inverted market may provide a signal that product is wanted sooner than later and may result in selling opportunities at harvest.
Cliff Jamieson can be reached at email@example.com
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