Wheat Prices May Top Before Conditions Bottom

By: Brian Grete

May  02,  2014

Untitled Document

Hello Pro Farmer Members!

The Wheat Quality Council conducted its annual HRW wheat tour through Kansas and fringe areas of surrounding states this week. To no surprise, the tour found poor yield prospects. In fact, the average yield on 587 samples tour scouts collected averaged 33.2 bu. per acre, the lowest tour yield since 2001. For perspective, the five-year average yield from the tour is 41.8 bu. per acre. Scouts saw a gamut of problems from freeze damage, to wind damage, to drought stress, with drought being by far the biggest concern. Most scouts came out of fields feeling late-season rains are needed for the crop to hold onto the yield potential they measured. And in some cases, rains now would be too late.

That's even moreso the case in southwestern areas of the Plains -- areas the Wheat Quality Council tour didn't venture into. Conditions are even worse in Oklahoma and Texas. The Oklahoma Grain and Feed Association estimates the Oklahoma wheat crop at 66.5 million bu., down 37% from last year's crop of 105.4 million bushels. That group's tour found an average yield of 18.52 bu. per acre in Oklahoma, which if realized, would be the state's smallest since 1967.

Yield prospects are a moving target that's very hard to hit in a year like this, but abandonment is even harder to peg than yields. Informa Economics on Friday projected total winter wheat abandonment at 8.6 million acres -- 20% of total plantings. Under the "poor" weather scenario in our 2014-15 balance sheet, we have total abandonment at 8.5 million acres. Others undoubtedly factor in more "lost" acres. In conversations with some Members and industry contracts in the Southern Plains, concerns with soil erosion (beyond what's already occurring with the Dust Bowl-like conditions) may keep some producers from ripping up or pasturing wheat acres -- even if they have no intention of harvesting them. As a result, actual harvested acres will be somewhat of a mystery. USDA will either have to lower its yield estimates for Plains states or "right off" more acres, but that decision may not come until much later.

As for USDA's assessment of the crop, its first survey-based estimate is May 9. Informa Economics pegs the HRW wheat crop at 840 million bushels. That's on the high end of the guess range. I've seen one estimate as low as 635 million bushels. Obviously, someone is going to be surprised by USDA's first estimate. USDA's crop peg very well could be a deciding factor if the wheat market continues to surge or if the price rally stalls.

What's it mean for markets? HRW wheat futures exploded higher this week amid the crop woes. July HRW futures pushed to their highest level since February 2013 as traders factored in crop losses. With temps expected to push well above normal across the Southern Plains this weekend and into early next week, further crop losses are likely. This heat wave will get some of the crop to wave the proverbial white flag. But keep in mind, supply-scare rallies are typically short-lived. And I have concerns that could be the case this year. To continue the price rally, fresh, bullish news is needed -- likely demand news. But I have doubts current wheat prices can encourage enough demand. In all likelihood, wheat prices will top before crop conditions bottom as there won't be enough demand to support even higher prices.

That's it for now...

... have a great weekend!

Follow me on Twitter at @BGrete

To join Pro Farmer, click here!