Grain market update: Focus on wheat

Market Focus

Highlights

  • Grain markets strengthened last week when news hit about possible changes to the American Renewable Fuels Standard
  • U.S. wheat futures are pulling back from their February highs
  • It's shaping up to be a competitive summer on the world wheat markets

Grain markets surged early last week amid speculation on potential changes to the U.S. Renewable Fuel Standard, but late-week profit-taking trimmed gains. This very fluid situation will likely keep market volatility high as rumours will continue until there's an official announcement.

Aside from the RFS situation, traders continue to monitor the South American crops and weather for price direction. USDA's supply/demand report (Mar. 9) should feature just minor fine tuning to the domestic U.S. balance sheets.

PFCanada believes ag markets will largely be a range trade affair in weeks leading up to spring planting. Thus a strong directional bias seems lacking amid our entry into the “waiting zone” between near completion of the South American growing season and launch of the Northern Hemisphere growing season.

Without an emerging crop threat, the world price grid on wheat will once again be a very competitive environment this summer.

Whether advancing equity/stock markets to new highs (and associated forward thinking expectations for improved GDP growth) is supportive to ag commodities is open to debate. Our view is that perceived undervaluation of ag markets relative to equity valuations is indeed price positive during the next three to four months, but thereafter fades as a supportive force by the last half June if timely North American crop planting occurs in tandem with an absence of crop threatening summer weather.

Wheat

Wheat markets are drawing interest these days, pulling back from their highs posted in February, notably in the case of spring wheat. Minneapolis May spring wheat futures at the time of writing (March 8) were trading at U.S. $5.37 per bushel, now well off the high of $5.70 posted in mid-February.

The spring wheat market has retreated back to important technical support in a number of ways, an intersection of sorts on price charts. Drawing a line under the rally from the late August lows, Minnie wheat futures are testing down to this extended upward trendline which currently intersects with both the 100- and 200-day moving averages ($5.43 and $5.41 respectively).

One could also note that the $5.40 level, which served as important chart resistance during the October-to-December period, now presumably has turned support since breaking above that level in early January.

Collapsing premium

Also noteworthy has been the collapsing premium seen of spring wheat over winter wheats. After peaking in early December when MGEX May spring wheat carried a premium of $1.25 per bushel over Kansas City May hard red winter wheat, that premium has now eroded to today standing at a 66 cent premium. The premium that spring wheat carried over other wheat closes has deteriorated notably.

It would appear that the big reason for withdrawal in the HRS/HRW price spread is tied to a sub-par start to 2017 U.S. HRW wheat crop on lower planted area and overall dry winter southern U.S. Plains moisture pattern that is forecast to persist through March. Then there is the unwinding of previously held long spring versus short winter wheat futures spread trade.

Weakening Canadian dollar

Interestingly, bearish trending U.S. spring wheat futures of late have been offset by improving Canadian cash basis levels. Western Canada spring wheat cash bids actually gained slightly in the past week as weakness in the Canadian dollar gave cash basis levels a boost.

That said, while a weaker Canadian dollar has worked to our benefit in stabilizing Prairie cash prices, despite a pull-back in spring wheat futures, I still must respect chart trends. And right now, MGEX May is challenging important chart support. Topside is now seen at $5.70 per bushel for May futures.

Without an emerging crop threat, the world price grid on wheat will once again be a very competitive environment this summer.

Mid-point Saskatchewan cash price for 1 CWRS 13.5 benchmark wheat at $6.50 per bushel should then be viewed as a selling opportunity, though such a price is seen not in the spot market, but in a deferred spring delivery position. Be watchful for localized basis specials and/or any short-term futures strength.

Mike Jubinville of Pro Farmer Canada offers information on commodity markets and marketing strategies. Call
204-654-4290 or visit www.pfcanada.com to find out more about his services.

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