Market Perspective

The wheat market has continued to rally over the last three weeks, resulting in marketing year highs for both old and new crop prices. New crop prices are now at higher levels than what most people sold this year's crop. When wheat markets were at their low at the end of January, the speculative funds were holding a short position in the Chicago futures of over 550 million bu. The size of last year's Soft Red Winter Wheat crop was 560 million bu. At that time China, Egypt and Iraq, along with other buyers, stepped into the market and made purchases. Export sales were strong before and have continued throughout this rally. At the same time, the crop conditions in the Southern Plains started to get the attention of traders. Winter wheat crop conditions slipped from 60% good to excellent to under 35% gd/ex by early February. They have continued to deteriorate and are now at 33% good to excellent in Kansas, 18% gd/ex in Oklahoma and only 11% gd/ex in Texas.

With that news, the funds started to cover their position. The Southern Plains continues to be dry and the Central U.S. continues to experience unseasonably cold weather raising concerns about winterkill in the wheat fields and planting delays for the spring crops. Add to the mix, the conflict between Russia and the Ukraine, and the speculative funds, as of Monday, are now about even in Chicago and long over 700 million bu in both corn and soybeans.

Here is a little perspective on the conflict in the Black Sea. Last year Russia produced 1.89 billion bu of wheat. The Ukraine produced 800 million bu. In comparison, the U.S. produced 2.1 billion bu. Russia is now the fourth largest exporter of wheat in the world and the Ukraine is the sixth largest. The Ukraine is also the third largest exporter of corn in the world. Despite the fact that grain facilities in the Black Sea are still operating the uncertainty for shipments in the future are making buyers leery of purchases from Russia and the Ukraine. In addition, the conflict has caused a sharp drop in the value of both currencies. Farmers in both countries are not selling their crop because its value has more stability then their money. The conflict has also caused a banking crisis in the Ukraine and to a smaller extent in Russia. Farmers may not get there spring crops planted because of financing.

Taken together, the market has gone from the attitude of "how low can we go?" to "how high is up?" It should be remembered that the corn crop will get planted, that the winter wheat crop has been killed many times before and still been harvested and that the world is not running out of grain. The outside markets also bear watching. China's economy is showing signs of slowing down. The Federal Reserve still plans to reduce its Treasury Bond purchases and raise interest rates. That would support a stronger Dollar which would have a negative effect on commodities in general. This rally could go higher if the funds continue to buy but it is showing some signs of fatigue and will need more bullish news, either weather related or an escalation of tensions in the Black Sea, in order to continue the rally. On Monday the USDA will release its Grain Stocks and Planting Intentions Report which could have a big impact on prices, one way or the other. Just remember wheat prices, both old and new crop, are still at attractive levels, especially at a starting point for next year's sales.