Market Perspective

The rally in the wheat market marches on as the two main reasons for this contra seasonal rally continue to support prices. First, the drought and now record high temperatures in the Southern Plains continue to stress the winter wheat crop there and second, the conflict in the Ukraine continues to intensify. Both stories now have the full attention of the market. Speculative funds, who not too long ago held a record short position in Chicago wheat, are now net long about 100 million bu., heading into this Friday's USDA Crop Production Report.

On Monday, the USDA Crop Progress showed the overall U.S. winter wheat crop rated 31% good to excellent, 1% lower than last year. But the Southern Plains are in much worse condition. Kansas is 17% good to excellent, Texas is 13% and Oklahoma is only 6% and that was before the 100 degree weather hit earlier this week with no meaningful precipitation in sight. In Oklahoma just over 50% of the crop is headed out and in Kansas just under 20% is headed, so this is a vulnerable time for the wheat crop there.

In the Ukraine, the pro-Russia militiamen have seized dozens of government buildings in eastern Ukraine. If the pro Russian forces capture Odessa, and Russia annexes the eastern coast, then Ukraine will be landlocked and that will create a major problem for Ukraine when they try to export their wheat and corn.

Now let's take a step back. In late January, when wheat prices were at their lows, the news was that there was plenty of wheat in the world and the new crop looked great. This despite the fact that U.S. export sales continued to chug along with price sensitive buyers like Egypt, Iraq and China all stepping up to the plate to buy U.S. wheat at that time. That along with the uncertainty of the condition of the winter wheat crop in the Southern Plains raised some doubts about the reasons for the price decline in the futures. At that time speculative funds were short 550 million bu.

That was then, this is now. While the market is focused on weather in the Southern Plains and the conflict in the Ukraine, U.S. wheat is pricing itself out of export sales. U.S. wheat is now .30/bu to .50/bu higher than world values and while it has not shown up on the export sales reports yet, it will. Also, the spread between Chicago wheat and Chicago corn is at a historically high level. So unlike last year, not much wheat will find its way into the feed channels. In addition, Canada still has almost 50% of last year's record wheat crop on hand and a large part of that will have to be carried over into this crop year. The wheat crops in other areas of the world are doing pretty well. Europe's looks good. So far Australia's is O.K. and the reports out of China are very good. So right now the markets are looking at the Southern Plains and the Ukraine but be careful not to get blindsided.