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Spring wheat rally unlikely to be short-lived

Harvest conditions have been terrible on the Prairies and northern U.S. Plains, and Australia’s crop is in trouble again

Poor harvest conditions in Western Canada and the northern Plains of the United States have led to a spring wheat price rally and there is likely more to come, says an analyst.

The December futures spread between Minneapolis and Kansas wheat was about $1.25 per bushel as of late last week.

That is well above the typical spread of 35 to 50 cents per bu.

Rain and snowfall in September and October caused serious downgrading of the spring wheat crop.

“There is a significant portion that’s going to be on the lower quality spectrum with some of it grading feed,” said Bruce Burnett, analyst with MarketsFarm.

He said the Minneapolis/Kansas December futures spread reached $1.50 per bushel about a month ago.

“You can probably see it retest that level,” he said.

The only thing holding spring wheat prices back is the overall bearish outlook for wheat in general. The U.S. Department of Agriculture is forecasting 765 million tonnes of global production, which is larger than either of the last two years.

Mills can use some of the glut of lower-quality wheat to blend with milling-quality wheat to make their flour.

“There is only so much of a premium you can stick into the market. That’s the only caveat,” said Burnett.

A couple of years ago the spread topped $2 per bu. Burnett doesn’t think this year’s supply of milling quality is as tight as it was that year but if Australia has a total wreck that may push prices to that level.

The USDA’s Foreign Agriculture Service (FAS) recently provided an update on Australia’s wheat crop. It is forecasting similar results as last year’s drought-ravaged crop.

The FAS is estimating 18 million tonnes of production, up from 17.3 million tonnes last year and 9.5 million tonnes of exports, a slight increase over last year’s nine million tonnes.

Burnett believes those estimates are high given this year’s dismal conditions and the non-existent carryout.

He thinks the USDA will eventually drop production to 16 to 17 million tonnes and will shave two to three million tonnes off of the export program.

If that happens it will likely lead to another spring wheat rally. And the tone of the FAS report makes it sound like that is a real possibility.

“While bumper crops in Western Australia helped offset poor eastern Australian harvests last year, this is not expected to be the case this year as crop conditions have worsened in Western Australia,” said the FAS.

In fact, the Grains Industry Association of Western Australia is forecasting 6.8 million tonnes of wheat production in Western Australia, down from 10.1 million tonnes last year.

Burnett can’t fathom why the FAS is forecasting a slight increase in exports considering almost all of the wheat grown in Western Australia is exported and production is way down.

That is why he is forecasting exports in the 6.5 to seven million tonne range.

Exports from eastern Australia were almost non-existent in 2018-19. In fact, the region was forced to import wheat from Canada, which is extremely rare.

Australia’s milling quality wheat is grown in northern New South Wales and Queensland and both of those regions have poor crops due to continued drought, so export prospects from eastern Australia are once again dismal.

The crop in Western Australia has a ways to go before harvest but the weather outlook over the next few months “does not look promising for the wheat producing regions,” stated the FAS report.

The Australian Bureau of Meteorology is predicting below-average rainfall and above average temperatures over the country’s entire grain growing region for the October through December 2019 period.

Some of the wheat will be cut for hay because the returns are expected to be higher than a poor-yielding crop, said the FAS.

Burnett said spring wheat prices could also drift higher if the entire wheat complex rises and there are signs that is starting to happen with increasing prices in Russia.

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