Last week CBOT wheat futures made another run to the upside, with prices moving above the peak seen at the end of February and start of March. The gains didn’t fully hold though, with profit taking ahead of the weekend.
A driver for the gains was the Kansas crop tour, which confirmed that the winter crop in the biggest winter wheat producing state in the US is in bad shape. Although only a part of the state is in severe drought, close to 85 per cent of the state is drought declared to some degree.
The crop is running late though, by up to two to three weeks. This is a double-edged sword. On the one hand it means the crop still has plenty of time to respond to rainfall events and rebuild some lost yield potential, but it pushes more of the crop into maturing in the hotter part of the year.
Historically we have seen a seasonal high set in the first week of May on a number of occasions. They tend to be when there are no crop issues on the horizon, and when the first USDA Report covering new season estimates indicates either a further projected lift in global wheat stocks, or at least stocks holding at high levels.
In other years, when crop production issues emerge in the northern hemisphere, we see the market form its seasonal peak in late June or July. Last year’s US spring wheat drought was an example, and in earlier years it tended to be issues with the crops in the Black Sea region.
This year we already have a well documented production issue with the US Hard Red Winter wheat crop centred on Kansas. In the past week we also had reports that April had been warmer and drier than normal in key winter wheat and barley producing areas of southern Russia and central Ukraine.
Spring crop establishment has also been delayed in Russia because of a slow snow melt. This is also an issue in the US and Canada, with wet conditions also slowing progress in parts of the EU.
The dilemma now is that the current production issues can resolve quickly. A week or so of fine weather will see a lot of planting progress take place right across the northern hemisphere spring cropping areas Under that scenario the impact of planting delays might evaporate.
Similarly, the Russians are saying it is too early to be worried about the dry conditions. Most observations are saying that despite the lack of recent rainfall, most crops are showing no signs of distress.
That leaves us with the May USDA Report. We already have an idea on what the numbers will say about wheat supply and demand for 2018/19, based on projections already published by the International Grains Council and the FAO. They are both suggesting that global wheat stocks will decline this year. US wheat stocks would also be expected to continue their decline.
However, the current indications, likely to be supported by the USDA, continue to suggest that global stocks, and stocks within the US will remain at historically high levels.
So, while we have the precursors for a further rally in wheat prices, it is possible that we are witnessing the seasonal high in prices now, with nearby futures prices near last year’s mid-year highs.
