I live and work in western North Dakota where spring wheat is still king. That isn’t necessarily because growers love growing spring wheat so much as it has to do with the climate and other environmental factors.
Truth be told, over the years a lot of spring wheat acres have lost out to other crops, including corn, soybeans, and canola (to name a few). But at the end of the day, a lot of my producers will go ahead and plant wheat.
Marketing wheat, especially spring wheat, can be difficult. The Minneapolis Wheat contracts are less liquid than the KC and Chicago contracts, and options are the epitome of illiquid. Add to that the fact that “wheat is going to do wheat things……” and wheat will make producers pull their hair out!
We should remember a couple important things when marketing a wheat crop.
- First is the fact that wheat is grown pretty much year-round across the globe.
- Second: all those other growers of wheat a competitive advantage: their cost structure, especially their cost of land.
That means there is almost always a wheat harvest occurring somewhere.
Even in Western North Dakota where cash rents and land prices are low relative to the Corn Belt, our foreign competitors still pay a far lower price. Ultimately, this means that they can sell their production at a discount.
This leaves the U.S. as the world’s reserve supplier of wheat and as a result our export program has shrunk significantly over the years. In 1988, U.S. all-wheat exports were slightly higher than 1.4 billion bushels. Over the last three years, the U.S. has exported less than 800 million bushels.
The rise and fall of a wheat rally
In the last two months we saw a large and very much needed rally in all three classes of wheat.
- September Minneapolis futures rallied from a mid-April low of $6.49 ½ to a late-May high of $7.76 ¼.
- July Chicago Wheat as well as July KC Wheat saw a $1.70 rally over the same time. Much of that rally was fueled by drought conditions in Russia, Ukraine and the E.U., as well as frost damage that occurred in portions of the Russian wheat crop.
This fueled managed money funds to lighten up their short positions in SRW and HRW and move to a net long position in HRS. And then, wheat did what it did best and disappointed farmers! In a matter of 12 trading days, HRW and SRW have given back a little over $1 in the July contracts.
An interesting comparison can be made if you take a stab at comparing it to analog years. In 2009, wheat had many of the same fundamental stories as we do in 2024. While they aren’t perfect comparisons, for the most part the U.S. fundamentals look similar. Production, ending stocks and stocks/use for all three classes of wheat have a similar story. Essentially, in the US we were and are building stocks and stocks-to-use levels after several years of declining supply-side fundamentals.
There are a few key differences between 2009 and 2024, and those are all on the world balance sheet.
- In 2009, world inventories were growing as well.
- In 2024, world inventories continue to shrink (although far from alarming levels).
- Another key difference is that in 2009, the managed money crowd was net long coming into the winter wheat harvest. While in 2024, they remain on the short side from a net position standpoint.
The eye-catching moment is when you overlay the 2024 chart on top of the 2009 chart. From Jan. 1 to the present, all three classes of wheat have followed a strikingly similar pattern. They say a picture is worth 1,000 words, so here you go:
Kansas City December 2009 (red and white chart) versus Kansas City December 2024 (blue and light blue):
To be clear, 2024 weather and geo-politics don’t care much about the 2009 charts. But traders do, and maybe all of this is a coincidence, but just in case, if you are a producer of wheat and you are sitting on a lot of new-crop bushels that needs to be priced, you may want to look at some hedging strategies. While selling wheat $1 off its recent highs is somewhat unpleasant, selling it another $1-$2 lower could be even more unpleasant.
Feel free to reach out to me or anyone on the AgMarket.Net team. We’d like to hear from you.
You may reach Tyler Schau at 701-987-6009 or anyone with the AgMarket.Net team at 844-4AG-MRKT.
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