Theodore Nelson: Wheat Merchandising: Drought Driving Market
Wheat complex is making its presence known the past couple months, as issues with the hard red spring (HRS) and Pacific Northwest white wheat (WW) crops have supported/driven the market higher in the face of good yields in soft red winter/hard red winter (SRW/HRW) crops.
The severe drought gripping the Northern Plains and Pacific Northwest is well known and inflicting critical damage on the wheat crops, as no reprieve looks to be in place for either the U.S. or Canadian crops.
Currently, the U.S. Department of Agriculture (USDA) is pegging U.S. HRS crop at 305 million bushels with a bias that number continues to fall. WW production is pegged at 237 million bushels, and I have a lower bias on that, as well.
The entire Pacific Northwest wheat belt saw 100-degree temperatures for days at a time while enduring a severe drought. This has several dryland regions seeing white wheat production down 30% to 50% and high protein for a class of wheat that usually needs about 10% and lower.
All that said, the HRW and SRW crops have been average to bumper crops in most areas. This has seen some sizeable selling across the scale for producers and pushing interior basis lower, as commercials finally see sizeable ownership positions.
But with the bigger yields comes a lower-protein crop, leading many commercials to tuck it away, given the decent carry in the futures market and look for any opportunity to unload the lower protein quality.
The next three months will be all about what the HRS and Canadian crops end up in production and quality and how that will, in turn, affect protein spreads and export demand, as these elevated HRW and SRW prices are not incentivizing a lot of export demand.
Theodore Nelson is a risk management consultant with StoneX Group Inc., Kansas City, MO; 800-255-6381.