A bullish reversal has occurred this week in wheat futures because concern about warm, dry weather in the southern U.S. Plains could pose a threat to the hard red winter wheat crop there.
This does not mean sunshine and lollipops for the wheat market, but maybe the floor has been reached and better times are ahead
Speculators and big funds were heavily net short in wheat, meaning they were all betting for lower prices as they often have this year, given the record large supply of wheat around the world.
Every time they get so heavily invested on one side of the market it presents a risk of big losses if a weather issue causes the price to rise. When they get cold feet and back off some of their short positions, it is called a short covering rally.
That was happening late last week and early this week as concern crept into the market about the early spring and dryness developing in Oklahoma, Texas and part of Kansas.
Spring has arrived early in many parts of the world, even here in Western Canada where high temperature records were broken in many parts.
It is warmer than normal almost everywhere in North America.
The situation will have implications for cropping all over the continent, but the most immediate effect is to push the big U.S. winter wheat crop out of dormancy.
It will need moisture to develop and also faces the threat of damage from spring frost.
Temperatures are also well above normal in Ukraine and Russia, so winter wheat crops there face a similar situation to those in the U.S. south.
The warm weather would be good news for yields and bad news for prices if there is rain and no frost. But the opposite would happen if there is an extended dry period or a sudden cold snap.
The situation has pushed wheat futures into a weather market several weeks earlier than normal.
Currently, the U.S. hard red winter wheat crop is in good shape and is much better than last year at this time.
In Kansas, the biggest winter wheat state, the crop was 59 percent good to excellent at the end of February, up from 44 percent last year at the same time.
In Oklahoma, 68 percent was good to excellent, up from 42 percent last year.
Things are good now, but on March 7 the temperature in Dodge City, Kansas, was expected to hit 27 C with winds of up to 66 kilometres per hour, the type of weather that quickly dries fields.
And in India where many crops are nearing maturity, weekend rain and hail storms lashed winter crop areas, damaging wheat and chickpeas. More rain is expected in the region after March 11.
The extent of damage is not known yet, but last year rain during the harvest period caused severe damage, with the wheat crop falling to 86.5 million tonnes from a forecast in February of 95.8 million. Pulse production fell to 17.15 million tonnes from a February forecast of 18.43 million. Could it happen again? Only time will tell.
These weather uncertainties might have stopped the decline in global wheat prices for now, but to break out of this year’s malaise, production would have to fall a lot.
Remember, global stocks carried into 2016-17 are expected to climb to about 213 million tonnes, up from 200 million last year, the International Grains Council forecasts. Carry in stocks among the major wheat exporters are expected to climb to 69.7 million tonnes from 63.1 million, although Canada will not contribute much to that total. Wheat stocks here by the end of this crop year will likely be as close to sold out as you can get.
The weight of market opinion remains that wheat supply will again be adequate-to-ample in the coming year.
But an early spring has brought weather uncertainty back into the market and who knows what could happen?