Wheat rally pauses

Mike Jubinville

Highlights

  • U.S. wheat futures markets have weakened over the past week since peaking shortly after the release of USDA latest round of crop reports
  • Cash basis and spring wheat futures spreads are deteriorating
  • Look to deferred delivery positions if looking to sell wheat

We are watching developments in wheat markets with increasing interest this week as potential storm clouds may be gathering. United States wheat futures markets have weakened over the past week since peaking shortly after the release of United States Department of Agriculture latest round of crop reports on Jan. 12.

Fundamental news to maintain a bullish price trend initiated just after the Christmas holiday has been lacking this week.

EU crop monitoring results

Somewhat bearish news of note is that the European Union's crop monitoring service suggests winterkill losses have been limited so far this season, despite temperatures being some of the coldest on record during the first half of January. Also, recent moisture across U.S. hard red winter wheat region is seen as positive, although dry weather is in the forecast for the near future.

PFCanada watches for underlying market conditions before undertaking new cash sales on spring wheat - call it the possible “canary in the coal mine.”

The milling wheat market, notably spring wheat, has experienced a nice run-up since after the Christmas holidays. However, I am becoming increasingly aware that Prairie cash basis for No. 1 and No. 2 Canadian western red spring 13.5 wheats have started eroding in the nearby spot delivery slots. However, favourable basis, and in turn better pricing opportunities reside in the deferred April/May delivery positions.

 

Bullish inverse prices

Also troublesome for me is the bullish inverse price relationship in Minneapolis spring wheat futures. Nearby March contract premium over the deferred May contract is eroding quickly now from last week’s high of more than 18 cents a bushel over to close on Jan. 24 at four-plus cents.

Freight on board Vancouver cash basis quotes for export have pulled back slightly and are now quoted at US$1.10 to $1.15 a bushel-over Minneapolis May futures, down from $1.25-over a month ago. Note Vancouver basis is only being quoted at this time for May shipping, as that appears to be the earliest that new volume sales can ship since the interior transportation system is fairly committed over the next two to three months. That explains partly why Prairie basis in the spot delivery position is much poorer than for late winter/spring delivery.

Clear weather for winter wheat

There are currently no weather threats for the U.S. winter wheat crop. Adequate supplies of hard red spring wheat appear to have moved into the commercial pipeline, both from the U.S. and Canadian perspective for now, which is evident on eroding spot cash basis and the deteriorating futures spread.

These are the kinds of underlying market conditions that PFCanada watches for before undertaking new cash sales on spring wheat - call it the possible “canary in the coal mine” flags for me.

Other elements to consider: There's a much bigger Australian and Argentine combined wheat output now on the market. The next big crops are in India and Pakistan. This year, India's wheat acres production prospects potentially rival the 2014-15 record large crop of 95 million tonnes.

Using advertised line company cash bids on benchmark No. 1 Canadian western red 13.5 spring wheat for a deferred April delivery position, $6.75 to $7 a bushel, Manitoba and Alberta, and $6.45 to $6.65 a bushel in Saskatchewan. Localized premiums may be available in some cases.

I recognize using an April delivery position potentially infringes on busy spring fieldwork, but the difference in cash basis opportunity for April relative to the discounted spot market basis is notable.

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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