Funds itching to invest in wheat

The U.S. crop is in poor condition, it is dry in the Black Sea region and Australian farmers are seeding into dust

A poor start to wheat crops around the world has piqued the interest of investment funds.

“The funds have a very favourable attitude towards the agricultural commodities right now and they’re looking for excuses to own them and that provides one more excuse for them to own,” said Arlan Suderman, chief commodities economist for INTL FCStone.

The U.S. crop is in poor condition, it is dry in the Black Sea region with no respite in sight and Australian farmers are seeding into dust.

Suderman said fundamentally there is no reason to be bullish wheat despite the early season struggles because global ending stocks are projected to be a record 271 million tonnes in 2017-18.

“But the funds like wheat and I’ve seen it enough times in history where the funds will take wheat for a ride when it wasn’t justified,” he said.

“I’m not going to stand in front of this train.”

Speaking of trains, there is a train wreck happening in the U.S. hard red winter wheat growing area.

The Wheat Quality Council recently completed its three-day tour of 644 Kansas wheat fields and determined the crop has the potential to yield 37 bushels per acre, the smallest since 1989. And that will only be achieved under ideal conditions for the remainder of the growing season.

Suderman said the crop is in poor shape with plenty of drought and frost damage and is extremely late.

“It’s going to be in the grain-fill stage during the June period when we tend to get a lot of heat and heat is the biggest robber of yield,” he said.

There are other areas of concern around the world as well. It is dry in the Black Sea region and the forecast calls for a continuation of that weather.

Reuters reports that Ukraine just experienced one of the most arid Aprils in its history. There is no damage to spring crops yet but some forecasters are already reducing their production estimates.

“If the (dry) pattern does persist as forecasters think that it will, then those losses would become more apparent,” said Suderman.

Australian farmers are planting wheat into dust following a severe drought that slashed 2017-18 wheat production 29 percent to 21.5 million tonnes. The dry conditions have continued into this year’s planting.

The U.S. Department of Agriculture reports that rainfall in southern and western Australia has been well below normal since the beginning of March, while temperatures have averaged 1 to 4 C above normal resulting in larger-than-usual evaporation rates in the wheat belt.

Suderman said it is not out of the question that if any of these situations get worse, wheat could rally despite bloated global stocks of the crop.

He likens it to what happened to crude oil prices, which bottomed out in February 2016 at $26.50 a barrel due to an extreme surplus.

The price doubled by June despite the world failing to chew into the surplus until the fall because the funds thought the worst news was behind them and it was time to buy.

Suderman said the same thing could happen with wheat and once prices start to lift it creates a whole new psychology in grain markets.

However, wheat is grown almost everywhere around the world and there is always some region increasing production and this year that could be South America.

Soybean & Corn Advisor reports that analyst T&F Consultoria Agroeconomica is forecasting South American wheat production to increase almost six percent in 2018.

That forecast is largely due to April rains in Argentina that were too late to help the soybean and corn crops but arrived just in time for seeding wheat.

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