Thanks to late plantings, a wet spring and a hot summer in several major wheat growing regions, the odds have increased that higher U.S. wheat prices will be seen this fall. In today’s report, we’ll review the major factors which point to stronger wheat prices in the coming months, despite the short-term headwind of U.S. dollar strength.
Let’s start this review by taking a look at some of the evidence which suggests lower U.S. wheat supplies will be seen this year compared to last year’s harvest. Winter wheat harvest is now underway in several major U.S. grain growing states. Progress reports and crop conditions have varied by state, but a common theme is emerging: yields are mostly lower than last year’s and harvest in many regions is behind schedule. A sampling of some leading wheat growing states provides some context for the below-average crop progress.
In Nebraska, winter wheat harvest is behind normal for this time of year according to the latest USDA progress report. Only 33% of Nebraska’s winter wheat was harvested as of Jul. 21 compared to 79% at this time last year.
Ohio’s wheat harvest was pegged by USDA at 83% as of Jul. 21 compared to 95% a year ago. This was 5% below the 5-year average.
In Idaho, the wheat harvest reportedly started 7-10 days behind the 5-year average. Yields meanwhile are down some 10% below last year’s record volume, according to a report from the Idaho Wheat Commission.
Michigan is the state with the worst wheat harvest progress report. USDA reported that just 14% of the state’s winter wheat was harvested as of Jul. 21, well below last year’s 65% and also below the 5-year average of 47%. This was due to the fact that Michigan suffered the third wettest year in the state’s history this year, which delayed planting of many crops by a month or more.
The supply and export outlook for wheat in the current growing year is shaping up to be a constructive one for the wheat bulls. USDA’s latest World Agricultural Supply and Demand Estimates (WASDE) outlook for 2019/20 U.S. wheat called for lower supplies, higher domestic use, larger exports, and reduced stocks. Specifically, USDA projected exports at 950 million bushels, up 14 million from the revised 2018/19 exports. Exportable supplies for several major exporters were also significantly reduced based on lower 2019/20 production forecasts. According to USDA’s July report:
As a result, the United States is expected to improve its export competitiveness, especially in the latter stages of the 2019/20 marketing year. Ending stocks for 2019/20 are projected 72 million bushels lower than last month at 1,000 million.”
USDA also said that foreign 2019/20 wheat supplies have declined by 10.5 million tons due mainly to lower production in several major exporting countries. The production declines are reportedly led by a 3.8-million-ton reduction for top producer Russia due to “extremely high temperatures and below-average precipitation in June during winter wheat grain fill.”
Indeed, Russia is the focus of growing concern across the industry. A summer heat wave has diminished the outlook for Russian wheat and has contributed to what many analysts believe will be lower global supplies. SovEcon, a leading Russian agriculture consultancy, recently cut its 2019 wheat crop forecast for Russia to 73.7 million tons from an earlier estimate of 76.6 million tons. The consultancy also cut its forecast for other Russian grain crops.
Another important consideration for the wheat price outlook is the Russian ruble currency. The ruble’s rise to a near 1-year high has made Russia’s wheat supplies less enticing for foreign buyers. Moreover, there’s less Russian wheat supply available for export due to diminished inventories.
Speaking of the ruble, wheat prices tend to track Russia’s currency. While there is sometimes a multi-month lag, the major trend in the ruble typically coincides with the intermediate-term (3-6 month) trend for wheat prices. The following graph shows the ruble to be fairly stable on a 1-year basis with a gradually rising slope. This harmonizes with the recent strength in wheat prices and increases the odds that this year’s anticipated below-average harvest will result in stronger wheat prices heading into the fall months.
Chicago wheat futures prices have declined by around 10% since peaking in late June. Slightly less than half the May-June wheat price rally was retraced during the latest market pullback, which technically suggests that buyers still control the dominant intermediate-term trend for wheat. As long as the 480.00 level in the continuous wheat contract (below) isn’t significantly violated on the downside, the wheat price trend can still be considered stable from an intermediate-term perspective.
On an immediate-term (1-4 week) basis, however, the wheat price is below its downward sloping 15-day moving average, which underscores the headwind wheat is facing from a strong U.S. dollar right now. This can be seen in the following graph of the U.S. Dollar Index (DXY), which commenced its latest rally just before wheat prices peaked. The strong dollar is having a much more profound effect on the September 2019 spring wheat futures contract, which is near its lowest price for the year to date as of July 25.
Moreover, continued strength in the dollar from here will create additional resistance for wheat prices in the immediate term, so any new purchases in wheat aren’t recommended right now. We need to see the dollar index weaken and return below its own 15-day moving average before new long positions can be initiated in wheat.
From the standpoint of the broader market for U.S. commodity futures, wheat prices should be able to remain fairly stable in the weeks ahead despite currency-related pressure. This is reflected in the following graph, which shows the 4-week rate of change (momentum) of the new quarterly highs and lows of the 30 most actively traded non-financial commodities. I use this indicator to gauge the near-term path of least resistance for commodity broad market.
As long as the momentum of the quarterly new highs-to-lows isn’t trending lower, traders can generally expect fairly stable, or range-bound, prices for most front-month commodity futures contracts. When this indicator establishes a declining trend, however, the commodities market outlook is considered to be bearish and traders should avoid long positions. The current position of this indicator suggests a neutral stance towards most commodities in the weeks immediately ahead. Ideally, this indicator should be rising before we get the next confirmed short-term buy signal for wheat futures or wheat ETFs.
In conclusion, wheat prices will likely remain range-bound, although subject to periodic bouts of dollar-related selling, in the next few weeks. However, I anticipate that prices eventually strengthen as we head closer to the October and the end of the spring wheat harvesting season. This is the time of year when wheat prices – especially when they’ve shown weakness in the summer months – have historically bottomed out. Wheat has also tended to rally based on seasonal factors during the months of October to December, especially in years when there are domestic or global supply constraints. Based on the weather-related and supply considerations discussed here, there is good reason for expecting a repetition of this bullish seasonal pattern this fall.
On a strategic note, I’m currently long the Teucrium Corn Fund (CORN) using a protective stop loss slightly under the 16.00 level on an intraday basis.
Disclosure: I am/we are long CORN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.