Spring wheat could find its wings

Spring wheat is poised for a bull run, say grain market analysts.

Todd Hultman, DTN’s lead analyst, has noticed a divergence between how commercial traders and fund managers view the Minneapolis wheat market.

Commercial traders, who are the folks that process and export the crop, have increased their net-long position to 17,951 contracts, the largest bullish position in many months.

Meanwhile, managed funds have increased their bearish net-short position to 24,643 contracts.

“That’s the largest bearish bet on record,” said Hultman.

He said managed funds tend to ride the trends in the market, ignoring what is going on with the fundamentals.

“They’re kind of the bad poker player at the table and they tend to make big bets at inopportune times,” said Hultman.

When there is a big disparity between what commercial traders and managed funds are doing he always sides with the commercial traders.

Bruce Burnett, analyst with MarketsFarm, has similar expectations of the market.

“I think we’re probably due for a rally in spring wheat here, especially if we ran into some production problems,” he said.

He noted that the spread in September futures contracts between Minneapolis and Chicago has gone from a 20-cent discount in late-April to a 10-cent premium late last week.

Burnett said Minneapolis wheat typically trades at a 35 to 50 cent premium, so there is still room for improvement.

“It does support spring wheat rallying a bit,” he said.

Hultman said futures prices for the Minneapolis July contract are near their lowest level in three years. Spring wheat did not participate in the winter rally that winter wheat experienced.

DTN’s national spring wheat index was $4.79 per bushel late last week, which is well below United States Department of Agriculture’s $5.90 cost of production estimate for the northern Great Plains. So he doesn’t see prices heading lower.

And there are signs of tightening supplies. The U.S hard red spring wheat stocks-to-use ratio is expected to be 41 percent at the end of 2019-20, which is high but well below the previous year’s levels of 59 percent.

Burnett said U.S. spring wheat exports have been brisk the past few months but the market has shrugged that off.

“Why the market has been discounting spring wheat here has been a bit of a mystery to me,” he said.

Hultman noted that seeding of the 2020-21 U.S. spring wheat crop is well behind with 27 percent of North Dakota’s crop in the ground as of May 10, which is nearly 30 percentage points behind the five-year average.

He doesn’t think farmers will plant the 12.6 million acres of spring wheat that the USDA is forecasting. There are also early signs of drought in western North Dakota and Montana, which could impact yields.

Any slightly bullish weather events could convince the managed funds to abandon their net short position, causing a rally in spring wheat prices.

He could see the July contract improving to $5.70 per bu. from $5.12 per bu. last week. If there is a serious weather event it could top $6.

Jim Peterson, policy and marketing director with the North Dakota Wheat Commission, doesn’t think a rally of that magnitude is in the cards.

“I just think we’re going to be hard-pressed to get to those levels,” he said.

He agreed with Hultman’s overall analysis but the reality is that the spring wheat market has been poised for a rally for the last six months and it never arrived.

There were harvest quality issues with last year’s crop in the U.S. and Canada, so farmers thought commercial buyers would be chasing the crop by offering attractive basis levels. But that never happened.

There were also rumours that China would be in the market for spring wheat in a big way but it ended up opting for U.S. winter wheat.

Peterson thinks there will actually be more spring wheat acres than the USDA is forecasting, maybe around 13 million acres.

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