Todd's Take

7 Jun 2016

By Todd Hultman
DTN Analyst

As a market analyst, I try to keep my feelings out of the way; but I have to admit a certain soft spot for wheat growers. Not that they need or want anyone's sympathy, but let's face it, turning a profit in wheat is no easy task these days.

If USDA's national estimates of all wheat production costs are reasonably close, December Chicago wheat futures prices have traded above cost in only 16 of the past 30 years and spent time below cost in all but three years. With cash prices typically lower than December futures prices, we can get a sense of the uphill climb faced by growers to eke out a profit.

Of course, some areas are better for wheat than others and higher yields increase the odds for turning a profit. For example, researchers at Kansas State estimated production costs for wheat in southeast Kansas totaled $5.47 a bushel a year ago based on a yield of 43 bushels per acre.* That is a significant advantage over USDA's estimated national cost of $7.09 a bushel for all wheat in 2015.** However, even $5.47 is too high when compared to the $4.81 1/4 that spot HRW wheat prices offered on Monday's close. For growers' sake, this market needs a boost.

If you have read anything about the wheat market lately, you know that prices have a serious public relations problem. The U.S. is carrying 1 billion bushels of wheat into the new season after finishing 2015-16 with the lowest exports in several decades. As of the end of May, USDA said 92% of the U.S. winter crops and 98% of the spring crops were rated fair or better. In addition, winter wheat crops have been generally favorable outside of the U.S.

The frosting on the bearish cake came last week when Bloomberg news posted the article, "No Room in U.S. Grain Silos Means Dumping Wheat in Parking Lots."*** As you can imagine, the article described a scenario that left no doubt that supplies are burdensome and prices must be headed lower.

So far, there has been little evidence to argue otherwise. Some winter crops were lost to severe weather in the southwestern Plains and flooding in Texas in the past two weeks. DTN Staff Reporter Emily Unglesbee found that stripe rust is prevalent throughout wheat country in 2016 and will reduce yields where not treated.**** Flooding in France and Germany also turned serious last week with some crop loss likely. But none of these events are likely to make much dent in world wheat supplies that are expected to show the highest ending stocks-to-use ratio since 1998.

Given this overwhelmingly bearish situation, the million dollar question becomes: Why aren't wheat prices going down? Similar to the soybean situation witnessed earlier this year, price behavior out of step with popular expectations is often a valuable clue that our expectations are off.

If we just focus on what prices are actually doing, we see that, except for one brief rally last June, spot wheat prices have been chopping mostly sideways for over a year and have not made a new contract low since Mar. 2. Noncommercial speculators have been bearish since last August and tried several times to drive prices lower with little success.

The biggest surge of selling came on Apr. 12 when specs' net-short positions reached a record high 105,685 contracts. At that time, spot wheat prices dipped to $4.46, but have held firm since, forcing specs to back down from their record commitments.

The unsung heroes in this story have been the commercial firms that have taken advantage of and supported wheat's cheap prices throughout these bearish assaults. As of Friday, CFTC data showed commercials net long 74,004 contracts, nearly matching the number of net-shorts held by specs.

Recently, I wrote about how narrow six-month ranges in soybeans and corn were early bullish clues this year when fundamental outlooks were bearish and a similar scenario is happening in wheat. Wheat's trading range is not the narrowest in 20 years as the soybeans' range was in March, but it is unusually narrow at less than half the width of its four-year average.

With global ending stocks-to-use ratios expected to reach their highest level in 19 years, wheat's narrow range stands in defiance to all we think we know. Wheat's bearish story has lost its ability to negatively affect prices and we should not overlook the importance of this unexpected support.

If, as I suspect, prices are headed higher, it would not be the first rally in the face of large, perceived supplies -- just ask this year's crude oil traders. Perhaps the market is figuring out that bearish speculators have no physical wheat to offer and demand at these lower prices has been better than advertised. Or perhaps the market's pendulum reached its limit and finally remembered that you can't have a wheat market without wheat producers.

Whatever the reason, the only thing we really need to know is that the market is throwing out bullish clues and the six-month high for July Chicago wheat is $5.18 1/2. We never know for sure how these things will turn out, but don't be surprised if wheat breaks out of this range to the upside.

* "Wheat Cost-Return Budget in Southeast Kansas," by Gregg Ibendahl, Daniel M. O'Brien, and Douglas Shoup at Kansas State Research and Extension, April 2015 found at:
https://www.bookstore.ksre.ksu.edu/…

** USDA Commodity Costs and Returns found at:
http://www.ers.usda.gov/…

*** "No Room in U.S. Grain Silos Means Dumping Wheat in Parking Lots" by Jeff Wilson and Megan Durisin of Bloomberg News, June 2, 2016 at:
http://www.bloomberg.com/…

**** "Wheat Gets Rusty" by DTN Staff Reporter Emily Unglesbee, June 3, 2016 at:
https://www.dtnpf.com/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman1

(CZ/SK)