A grain market analyst says wheat prices are approaching the point where farmers should consider locking up a sizable portion of their anticipated harvest.
Prices rebounded earlier this month in response to reports of poor crops in the Black Sea region and the European Union and trouble with the winter wheat crop in Kansas.
“We’ve been waiting for something like this to develop,” said Derek Squair, president of Agri-Trend Marketing Inc.
He believes wheat is still undervalued, but it is approaching the target price the company has set for its growers of $7.75 to $8 per bushel for No. 1 Canada Western Red Spring Wheat for fall delivery.
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The average price was around $7.25 per bu. late last week, which is where it was three or four months ago. In between it fell to a low of $6.65 per bu.
“We’ve got a little ways to go yet, but it looks like it’s starting,” said Squair.
Any further problems with the U.S. winter wheat crop or with excess moisture in southeastern Saskatchewan could push prices into the target range in the next month or two. Much will also depend on Russia and Australia, which have been dry but got welcome rain on the weekend.
If problems develop that push wheat futures a little higher, growers should consider selling enough wheat to cover their variable costs, which could represent 25 to 40 percent of their anticipated harvest.
CWB analyst Neil Townsend is more bullish on wheat than he was a couple of weeks ago.
“There’s going to be some positives for price,” he said.
“If we start to have problems in corn, then holy cow, the game is on.”
In its latest monthly crop outlook update, the International Grains Council cut its estimate of world wheat production by five million tonnes to 671 million tonnes in 2012-13. It reduced Russia’s wheat crop by three million tonnes and the European Union’s by two million tonnes.
Townsend said countries like Egypt are going to have to look somewhere else for their wheat, particularly the United States. That is going to lead to tighter supplies and higher prices for U.S. and Canadian wheat.
There may also be serious competition for available export capacity from what is expected to be large U.S. corn and soybean crops, which could pressure prices higher.
And then there’s Australia’s crop. The United States is forecasting a 26 million tonne crop, but forecasters are calling for an El Nino weather event, which would result in dry conditions later in the growing season.
“They thought they were going to get 26 million tonnes lots of times and they end up at 18 or 17 or 16,” said Townsend.
One bearish factor in the wheat market is that the recent price hike has made it less favourable to use as a substitute for corn in feed rations.
Townsend believes the U.S. Department of Agriculture will reduce the amount of wheat used for feed in the U.S. in the June edition of its World Agricultural Supply and Demand Estimates.
The USDA has penciled in 230 million bu. of wheat going for feed, a 28 percent increase over last year. That number will surely drop, given the increase in wheat prices and the fact that the corn crop will likely be harvested three weeks ahead of schedule, which should drive down the basis levels for corn.
Townsend said there is a lot of resistance to feeding wheat in the U.S. because it has to be used for the whole cycle of an animal’s life. Livestock producers would rather use corn, sorghum or distillers grain.
He also anticipates a slowdown in Chinese feed wheat demand. China has been buying a lot of U.S. corn, but it has also bought 2.4 million tonnes of wheat in 2012-13, about half of which has been Australian feed wheat.
Australian feed wheat had been cheaper than U.S. corn, but that is no longer the case. China will switch back to corn if the U.S. harvests a large corn crop, as expected.
The International Grains Council is forecasting 1.8 million tonnes of Chinese wheat imports in 2012-13, down from 2.8 million tonnes this year.
There is still strong demand for milling wheat as China’s citizens increasingly embrace western fast food restaurants, said U.S. Wheat Associates spokesperson Steve Mercer.
“There are two or three McDonald’s opening every day there,” he said.
The country needs to bring in high quality wheat to blend with its domestic medium protein wheat to create flour suitable for making western-style food.
China has imported 600,000 tonnes of U.S. wheat in 2011-12, most of which was bread wheat.
It has also imported 227,000 tonnes of Canadian wheat, up from 58,000 tonnes the same time last year.
That’s in addition to mopping up a lot of feed wheat from Australia and Kazakhstan.
“It’s a good thing that they’re buying because wheat prices would be pretty low,” said Mercer.
“With all the supplies out of Russia, it would be tougher for our U.S. and Canadian producers, that’s for sure.”
