By Todd Hultman
DTN Analyst
Last week's hard red winter wheat tour, sponsored by the U.S. Wheat Quality Council, came on the heels of a heavy snow in western Kansas, highlighting what could be the first significant production threat for wheat this year. The tour estimated Kansas wheat production at 282 million bushels in 2017, down a hefty 185 million bushels from a year ago.
That is not enough to erase the 1.16 billion bushel surplus that USDA expects the U.S. to start with in the 2017-18 marketing year, but if the tour estimate is close, it does give noncommercial traders reason to reevaluate their heavy short positions. Sure enough, Friday's CFTC data showed noncommercials cut back net shorts in Chicago wheat from a record high 130,036 to 84,985 on May 2.
While the HRW tour was trying to figure out how much winter wheat might recover from last weekend's storm, the more northern spring wheat states and Canadian prairies were getting a more favorable forecast of warmer weather ahead. As DTN Senior Ag Meteorologist Joel Burgio wrote last Thursday, "a period of more favorable weather for spring fieldwork in the prairies is expected to last for at least the next 10 days..." http://bit.ly/…. Such a helpful forecast would normally be greeted with lower prices. July Minneapolis wheat has chopped lower since the previous Monday's rally, but it is also staying well above its April low of $5.23 1/2, thanks to a re-emergence of commercial support along with early concerns about this year's crops.
You may remember that in 2016, Minneapolis wheat was the only one of the three main contracts to boast a modest gain of nearly 10%. That was somewhat unusual in a year when world wheat production hit a new record high and the 2016-17 U.S. ending wheat stocks-to-use ratio hit 52%, its highest in 30 years.
However, wheat buyers were attracted to spring wheat's higher protein content in 2016, and I suspect that may be the case again in 2017. One of the reasons I say that is because CFTC data shows us how commercials increased their net longs to an uncommonly high 11,107 contracts in early August of 2016 after spot prices dropped below $5.00, near the low for the year.
After a brief rally in August, prices fell back below $5.00 in September and commercials returned again. After September, spot Minneapolis prices rallied nearly a dollar a bushel to a peak of $5.90 in mid-January of 2017 and made Minneapolis the one wheat worth owning in last year's bear market.
After the January peak, Minneapolis wheat spent the next three months giving back 75% of the rally, which shook noncommercial traders out of the market. Commercial net longs returned in early April, but this time spot prices were below $5.25 -- a higher level of support than what was seen last fall. That is why I suspect there is still good demand for spring wheat.
The other bullish evidence to note included a change in trend on Monday, May 1, when July Minneapolis wheat posted its highest close in eight weeks. Prices have fallen back since but are still above their recent lows. The weekly stochastic also finished last week with a bullish turn in momentum.
Fundamentally speaking, it is still too early to tell just how much wheat in Kansas will recover, or how well Canada will recover from their slow planting start. Unfortunately, Wednesday's WASDE report also won't be of much help as USDA's assessments were made in late-April and early-May, some before the heavy snow even fell.
With plenty of unanswered questions still in front of us, the pertinent market clues in early May are offering hints of higher spring wheat prices ahead.
Todd Hultman can be reached at Todd.Hultman@dtn.com
Follow Todd Hultman on Twitter @ToddHultman1
(ES/AG)
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