Volatility is name of game for spring wheat

By MARK CONLON, Editor
Friday, May 25, 2007 3:34 PM CDT

The U.S. wheat market is trying to sort itself out. That's why the market has been very volatile of late.

“Volatility is the name of the game in the wheat market,” said Jim Peterson, marketing director for the North Dakota Wheat Commission. “The market is sorting out a direction with lots of new information coming into the market. There are a lot of factors that traders are looking at.”

One item is that the 2007 world wheat crop is in development with the winter wheat crop nearing harvest and spring wheat nearing the completion of planting.

“And corn is still impacting wheat,” Peterson noted. “Corn needs a strong crop this year. Any adverse weather in the Corn Belt will have an impact on where wheat goes. Although wheat is beating its own drum, it is still being influenced by background noise (of other commodities).”

This is typically a time of year when wheat prices trend lower because of the pending winter wheat harvest, which will begin filling the pipelines.

However, bullish USDA reports, the uncertainty of damage to the winter wheat crop, and better than expected export sales have combined to keep prices better.

Futures prices, according to Peterson, had dipped to $4.70 in early April, but by late April they had reached back up to $5.46. Now they're hung up in the range of $5.00-$5.30.

“Chicago and Kansas City are lower than Minneapolis,” Peterson noted. “They're locked in at a 20-cent trading range, about 30-40 cents lower than Minneapolis.”

Local cash prices for 14 percent protein spring wheat range from $4.50 to $5 with an average of $4.75. New crop prices are still attractive at $4.60 to $4.85.

“There hasn't been much movement of old crop,” Peterson noted. “Prices are still at the top end of where they've been all year.”

Peterson said there are a few factors the market has been reacting to of late, including USDA's first survey-based production report.

“As expected, production is projected up 20 percent from 2006 to 2.2 billion bushels,” he said. “The big increase is in hard red winter wheat which is up 50 percent.

“The report isn't as bullish as some thought,” he continued. “They felt there would be more damage to the winter wheat crop.”

On the positive side, USDA is projecting an increase in export and domestic use. Exports are expected to increase 7 percent while domestic use is projected to increase by 5 percent.

“Even though production is expected to increase 20 percent, because of the better demand, stocks are expected to only increase by 14 percent,” Peterson said.

On another good note, USDA's yearly average farm price is forecast at $4.35-$4.95 with a mid point of $4.65.

“This year we're averaging $4.27,” Peterson said. “If we hit that $4.65 mid point, that would top the previous high of $4.55 set in 1995.”

Prompting the better price forecast is a tighter world wheat situation. World wheat production is projected at 22.7 billion bushels, an increase of 4 percent over last year's 21.8 billion.

“That would be the third largest world wheat crop on record,” Peterson said, “but because of record world wheat usage that's projected, consumption will still outpace production. And that gives more potential for a price rally.”

World wheat carryover stocks are projected at 4.1 billion bushels by June 2008. That would be the lowest carryover level since 1977-78 when stocks totaled 4 billion bushels. It would mark the fourth straight year of declining world stocks.

When compared to early winter estimates, smaller crops are anticipated in Europe and China which have experienced hot, dry conditions. The Ukraine,which was wet and cold, but is now seeing drier conditions, is expecting a smaller crop as well.

Peterson said a lot depends on the North American wheat crop, adding that 85 percent of the hard red spring wheat crop is planted and off to a good start, although fewer acres are being planted in the U.S. and Canada than last year.

The U.S. export pace has been better than expected at the end of the marketing year, according to Peterson. To date 889 million bushels of all wheat has been sold. That's just two percent short of USDA's projection of 910 million bushels.

“All year we had been lagging about 10 percent behind, so we've closed the gap considerably,” Peterson said.

Spring wheat exports, at 249 million bushels, is expected to reach USDA's goal of 250 million bushels. Plus, there are 13 million bushels of new crop sales on the books, so that's a good sign.

“The world situation is also looking tighter than it did three months ago, so that's positive,” Peterson said. “And prices are not falling off like they typically do with the approaching winter wheat harvest, but I don't think the volatility issue is going to go away, and sharply lower trends may still not be out of the question.”

Comments »

Comment on this story

Comments will be approved within 48 hours

Name:

Email: (optional)

Comments:

Image Verification: (Case sensitive)