Wheat Price Rally May Continue



EDMONTON - Aug 9/18 - SNS -- Problems in many wheat producing regions around the world could result in a sustained improvement in wheat prices, believes Neil Blue, provincial crop market analyst with Alberta Agriculture and Forestry.

As wheat is grown in many locations around the world, Blue says that it tends to be stable in production, as one region's production shortfall is usually offset by another's large crop.

"In each of the past five consecutive years - 2013 to 2017 - total world wheat production exceeded consumption even as demand grew. This resulted in accumulating world wheat supplies to record levels. In particular, Russian had a record wheat crop last year and has been an aggressive exporter.

"However this year, because of moisture shortages with the U.S. winter wheat crops, and in Europe - including the U.K., France, Germany, Poland, Russia, and Ukraine - wheat production estimates are lower. Then, rains came to Eastern Europe during harvest which damaged crop quality and further reduced their yield estimates. A severe drought in Eastern Australia has cut expected production there. The hot, dry weather in the northwestern U.S. and western Canada may have reduced crop yields in these areas as well. Dryness in China is also getting some headlines, even though China is not a wheat exporter," explains Blue.

Another market factor is the actions of speculators. Says Blue, "The non-commercial traders, or speculators, have been successful on the sell side of the wheat market for months. However, those speculative traders and investment fund managers have now bought back their sell positions and are long the winter wheat futures market. Their "buy" positions are now the highest since the price rally in July 2017. The speculators are still short Minneapolis spring wheat futures on expected higher U.S. production. However, if current market sentiment continues, those positions could also be bought back, which would further support the spring wheat prices."

Blue says that this wheat price rally may hold instead of failing as it did last year, as so many regions around the world are now projecting a wheat crop shortfall. "To put it in perspective, the USDA estimated in its last monthly report that next crop year's world wheat stocks would fall by about 13 million tonnes or about 5% from year ago. If just wheat exporting countries are considered, the percentage drop in wheat stocks is even greater. Though, it is early in the price improvement. As of July 31, wheat cash and futures prices have not yet exceeded the levels of this past May and are not as high as during last summer's rally. However, market sentiment seems to be positive, so it is more likely that price setbacks will be supported."

"From a Canadian perspective," adds Blue, "Our non-durum wheat exports to the end of July will exceed those of the last crop year by about 1.5 million tonnes, and domestic wheat use is also higher. Canadian non-durum wheat stocks are forecast to be lower than July 31, 2017 and forecast to be lower yet next crop year-end. If we get another high quality harvest, there should be good delivery opportunity this year."

Blue suggests producers consider basis levels when marketing their wheat. "Basis levels, or cash price minus futures price, are an indicator of demand. While futures prices have been rising, general Canada Prairie Spring (CPS) and Hard Red Spring (HRS) basis levels for both spot and deferred delivery have been strengthening. That is a good signal while it holds, however basis levels usually weaken into harvest. Producers may consider locking in some wheat on at least the basis for deferred delivery. The Alberta Wheat Commission operates www.pdqinfo.ca, and it is a source of general wheat basis history that can give some basis reference for CPS and HRS wheats."

Blue outlines other near-term factors that crop producers should keep in mind. "The US wheat futures markets that relate to our wheat markets are still in a significant carrying charge situation, that is, higher prices for each successive futures month. That does not necessarily mean that spot wheat prices will be higher in the future than now. A producer can take advantage of that carrying charge by locking it in via deferred delivery contract, particularly if that deferred basis level is attractive enough. If the basis for that deferred period is not considered strong enough, then hedging via the futures or options market for that forward period are alternatives to consider."