Has the bull market in wheat peaked? Or about to resume?
Has the bull market in wheat peaked? Or about to resume?
What the WASDE Wizard ® shows:
While certainly possible HRW wheat yields will be down sharply, the outlook for SRW yields is still quite good. Spring wheat sowing is well behind schedule due to a late spring, but today’s modern equipment is so huge and efficient producers frequently stun traders with how fast planting can “catch up” in a week to 10 days of open weather. The market is not running out of bullish news, however. Now there are reports of frost damage in the S. Plains and deteriorating yield prospects in Russia and Australia. A bull market has to “eat every day” but this one is still getting fed! Fig. 1 shows what the Wizard forecasting model shows with latest planted acreage estimates from USDA and my estimates for acreage harvested and average yields under three weather scenarios going forward: adverse, normal or excellent.
Why I’ve widened the 2017-18 price range from USDA’s April WASDE report: That report actually pegs the season average price for all wheat between $4.60 and $4.70 with a midpoint of $4.65. That’s because we’re only one month away from the end of the 2017-18 marketing year. Last May, when USDA issued its initial balance sheet for 2017-18 wheat, the forecast range was $3.85 to $4.65; an 80-cent spread with a midpoint of $4.25. At the start of a growing season, USDA has to allow for a wide range of weather and yield prospects both here and abroad; hence a wide range for season average price.
As the season unfolds, more is known about weather and crop prospects so the forecast range keeps narrowing to just the 10-cent range issued last month. The price forecasting algorithms in the Wizard forecasting model for the 2018-19 season need to have a wider range for the same reason. So while I left the “midpoint” for 2017-18 exactly where USDA pegs it, I widened the range to 80 cents. I wouldn’t dare program the model to attempt to forecast 2018-19 within just a 10-cent range with a whole array of weather possibilities here and abroad from now to May of 2019!
There’s still only limited value in forecast price ranges for “all wheat”, of course. There are major differences in futures prices among soft red winter (SRW) wheat traded at the CBOT, hard red winter (HRW) traded at the KCBT and hard red spring (HRS) traded at the MGE. That’s why another Wizard tool looks at spread relationships among the three exchanges to “apportion” USDA’s “all wheat” price among the classes. Those spreads are subject to change of course, and many speculative traders actually trade the spreads themselves. As they do change, the Wizard model adjusts the “apportionment” of USDA’s all wheat price accordingly.
Then there’s that pesky issue of basis. USDA’s price forecasts are for the average cash price received by farmers. To get a “futures equivalent” for these prices, they must be adjusted for basis. Even that’s a challenge because basis also varies substantially among different classes of wheat grown in different parts of the country. The Wizard model uses a well-known source of cash bids around the country to calculate the “average basis” for these different regions and different classes of wheat to come up with Figure 2: A model that converts Wizard cash price ranges into “futures equivalent” forecasts for all three exchanges trading wheat:
So where are CURRENT futures within these class-by-class ranges? Figure 3 shows it with my “stoplight” color-coding, where a red box surrounds the “adverse weather” scenario, a yellow box surrounds the “normal weather” scenario and a green box surrounds the “excellent weather” scenario for all three wheat classes at each exchange:
Looking first at MGE spring wheat in the upper left, you’ll see its still trading in the red “adverse weather” zone but pointed lower. In fact, it’s also trading in the upper third of the yellow zone “normal weather scenario.” That’s quite appropriate since no one can rule out a normal growing season for spring wheat, assuming planting progress catches up to normal. If new bullish developments occur, however, there’s room in the “red zone” for new highs.
Looking next at KC HRW wheat in the middle, you’ll notice it got into the upper half of the red zone and the upper third of the yellow normal zone at the peak of the March rally, but is now barely in the red zone, the lower half of the yellow zone. Yield estimates are still falling, now with reports of frost damage on already drought-stricken Plains wheat. There may well be a good “rebound rally” left, but it should be seen as a selling opportunity. We could yet see excellent weather scenarios unfold for SRW and HRS crops. Further, we cannot forget that beginning stocks left over from the 2017 crop will be extremely large and the 2018-19 marketing year for wheat doesn’t even begin until June 1 and goes until May of 2019! A LOT can happen here and abroad over the next 13 months to lessen the impact of crop woes we’re witnessing now.
Looking at CBOT SRW wheat on the right in Fig. 3, notice my caption describes it as “just along for the ride” with strong markets in KC and MGE. That’s because ending stocks for SRW are overwhelmingly large; a 275-day supply at the current rate of annual usage when it takes a 90-day supply or less to be at even the “threshold” of tight ending stocks. The jury is still out on yields for SRW but no reason to eliminate the possibility of an “excellent weather” scenario unfolding.
The bottom line is that the tailwind from drought in S. America and the U.S. southern Plains may not be enough to jumpstart the bull market in wheat as attention turns to the rest of the growing season here and abroad going forward.
Stay tuned for the next Bare Knuckles column where I’ll see what the WASDE Wizard® model shows for possible price ranges for 2018-19 corn and soybeans after USDA’s initial balance sheets are posted on May 10!
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