Welch on Wheat: New Crop Spread a Bearish Indicator

    Jointing wheat.

    Market Situation

    Crop Progress. Winter wheat condition ratings released this afternoon show a 1% increase in the poor category and a 1% decrease in fair lowering the crop condition index from 365 to 364. This number is still well above the average for this week of the crop year of 328.

    The Texas wheat rating slipped 3 points this week, down to 342. The percent rated poor increased 1% while the excellent declined 1%. The average crop index score for Texas wheat at this time of year is 286.

    The percentage of wheat in Kansas rated as good and excellent went up this week, from 54% on May 8 to 57% today.

    Comparisons of these same categories in other states show a wheat crop in good shape: Oklahoma good and excellent unchanged at 65%; Colorado good and excellent down 1 point, 66% to 65%; Nebraska good and excellent up 1 point, 66% to 67%.

    Weather. This morning’s precipitation forecast again calls for significant rainfall this week over much of the hard red winter wheat production area. Many areas of Texas need fields to dry out to prevent lodging or quality issues at harvest.

    Normally, Texas harvest is about 20% complete by the first of June. In the May Crop Production report, USDA put the average Texas wheat yield at 30.0 bushels per acre (the same as last year and right at the 30-year average). Total Texas wheat production is estimated at 84 million bushels, down from 106.5 million last year due to 750,000 fewer harvested acres.

    In the ENSO update today from the Climate Prediction Center, the likelihood of the development of La Nina conditions this fall was increased from 65% to 75%. The observed weekly temperature departure was +0.6°C, down from +0.8°C last week. The presence of La Nina in October/November/December means an increased likelihood of drier than normal conditions in the south and southwestern U.S. at wheat sowing and drier than normal conditions in Argentina and southern Brazil at wheat filling and corn and soybean planting.

    Commitment of Traders. Futures positions held by Managed Money traders in corn and soybeans were still net long in last Friday’s Commitment of Traders report, and still net short in both wheat markets. Long positions in corn were trimmed last Tuesday by over 27,000 contracts but long positions in soybeans increased by over 31,000. For the complex as a whole, positions are still net long by over 100,000 contracts and the price index is up from 511 at the first of March to 621.

    The spread between new crop July Kansas City wheat and September is 16 cents today, above full carry for that 60 day period (2 months x 6 cents per bushel/month = 12 cents). Any percentage of carry above 67% is generally considered to be a bearish commercial market indicator.

    Marketing Strategies

    2016 Wheat Marketing Plan. I am 45% priced on the 2016 wheat crop. Production prospects for the U.S. continue to look positive given better than normal crop condition ratings. Some price support could spillover from a rally in the corn market or production problems overseas, given that the U.S. only accounts for 7% of world wheat production.

    Upcoming Reports/Events.
    May 20 – Cattle on Feed
    June 7 – Grain Grading Workshop, Corpus Christi
    June 10 – WASDE
    June 24 – Cattle on Feed
    June 30 – Acreage; Grain Stocks

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