Soft wheat futures score rare lead over spring wheat

Wheat market bullishness, particularly tight U.S. supplies of soft wheat, has driven the Chicago wheat futures price into a rare lead over Minneapolis spring wheat.

There are fundamental supply-demand factors supporting wheat prices and some think there is a possibility that spring wheat will eventually ride the coattails of Chicago higher.

But there is also reason for caution.

Speculators in the Chicago contract are now net long, meaning they generally expect the price to rise.

But there is risk of the contract getting overbought, leading to a correction move downward.

As this column was written Jan. 24, the Chicago contract had backed down a little from the high Jan. 22 when at one point it touched US$5.90 per bushel, a level not seen since August 2018 and at the top end of the range of the past five years.

The Minneapolis wheat price was about 25 cents behind that level and was significantly less than it was a year ago.

Chicago has led Minneapolis most days since mid-November, an almost unheard of situation given that spring wheat is usually considered a more valuable product.

However, reduced seeded acreage and bad weather in the U.S. Midwest slashed production of soft wheat to about 239 million bu., down 16 percent from the year before and down 31 percent from the five-year average. Supply can’t keep up with demand.

The U.S. Department of Agriculture forecasts soft wheat stocks at the end of the year will be 106 million bu., down 33 percent from the year before and the smallest since 2007-08.

The supplies of soft red wheat appear to be in strong hands and buyers are having to offer attractive basis to get needed supplies.

Meanwhile, hard red spring stocks at 264 million bu., or 7.2 million tonnes, are expected to be little changed from last year and are larger than the previous two years so buyers are simply not spooked about its supply as they are about soft wheat.

Also of note are expected Canadian year-end, non-durum wheat stocks of five million tonnes, up from 4.2 million last year and considered comfortable.

These year-end stock forecasts will be updated in coming months based on factors such as the pace of exports.

U.S. all-wheat exports to date are running more than 20 percent ahead of last year. Canadian non-durum wheat exports are running 16 percent behind last year’s level and will have to pick up the pace to match the Agriculture Canada forecast.

To recap, Chicago’s premium over Minneapolis reflects a real supply-demand situation: soft wheat supply is very tight but hard spring wheat supply is comfortable.

I think another factor in Chicago’s favour is that it is more instantly influenced by global issues.

Even though the U.S. soft red wheat crop is much smaller than its hard red winter and hard red spring crops, the Chicago futures contract sees much more trade and is the stand in for global wheat.

For example, on Jan. 23 the Chicago March contract saw about 54,500 trades, while the Kansas hard red winter contract saw 20,450 trades and Minneapolis only 3,000.

And the global wheat trade has been paying attention to tightening supply of exportable wheat in Russia, dry, warm weather in parts of the Black Sea region and a series of strikes in France going on for weeks that are interfering with wheat exports.

The strikes are protests over President Emmanuel Macron’s desire to replace France’s current system of dozens of pension schemes with varying retirement ages and benefits with a universal system that also increases the official retirement age to 64 from 62.

Other factors supporting wheat prices are Australia’s small harvest and hopes that the recently signed trade deal between China and the U.S. will cause the Asian giant to import more wheat.

But these issues have now been in the news for weeks and have been priced into the market.

While the tightness of Chicago soft wheat might help it retain the premium over other wheat futures contracts, the overall wheat market rally might have run its course. To fire it up again the market will require more fuel, or news.

Potential sales to China must be replaced by actual inked export contracts. The possibility of damage to Black Sea wheat must be replaced with actual freezing weather.

On the other hand, I think there are enough supporting factors that will prevent a price collapse.

Likely prices will come off the recent peak and then stay fairly steady until there is new information, which could be about Black Sea weather or China’s buying or lack thereof.

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