Farm Futures - Weekly Market Recap

Weekly Market Recap
Bryce Knorr, Farm Futures senior editor
May 22, 2015

Wheat was the first market to crack during the rallies of 2008, 2010 and 2012. Now it may be charged with leading the pack out of the wilderness.

While corn and soybeans foundered in May, wheat broke out of a downtrend that had kept prices grinding lower in 2015. To be sure bulls still must prove gains came from more than short-covering by big speculators who held record bearish bets in winter wheat as the rally got going. But there were hopes these signs of life were the start of something bigger.

Of the big three grain markets, wheat is the most global, grown just about everywhere. That makes it harder for rallies to get going, because a crop is always ready to be harvested somewhere. But when crop failures multiply, rallies can have legs that last. Lack of bread topples governments, both dictators and democracies. Wheat products aren't glamorous, but they are a staple, and buyers will pay what it takes to cover basic needs.

Wheat tends to trade in five-year cycles: The last major lows came in 2009 and were confirmed in 2010, so the market is due.

This year's U.S. winter wheat crop saw it all: Drought and winterkill, floods and freezes. Persistent rains helped ease chronic drought over the southern Plains. But coupled with storms into the Delta they raised concerns about damage and quality losses. Basis at key terminals like Toledo and Salina, Kansas firmed despite the rally on the board, a signal end users were getting nervous.

Spring wheat was planted quickly across the northern Plains, but faced its own challenges from cold weather and dry fields that extended to parts of the Canadian Prairies. Still, the first ratings for the crop were good. Combined with winter wheat and durum forecasts they suggest potential production between 2.05 billion and 2.15 billion bushels. That would be enough to keep ending stocks between 750 million and 800 million bushels, a fairly burdensome level historically.

Further losses in the U.S. could change that dynamic. Otherwise, an extended rally in wheat depends on additional problems in other growing regions. The May rally got going after forecasters said development of El Nino was all but a done deal for this summer, with the warming of the equatorial Pacific potentially lasting through the end of the year. This event likely is responsible for the wet weather across the southern tier of states in the U.S., and is also associated with some of the extreme dry seasons seen in Australia. So far, however, the impact Down Under was minimal, with farmers actually seeing good moisture as they seeded wheat.

Other key growing regions, including the Black Sea and China, got off to a good start but showed signs of drying during second half of May. The trends didn't yet raise alarms, with conditions in Western Europe once again good.

So far, at least, the current rally looked like it lacked long-term potential. That meant gains were still a selling opportunity ahead of potential weakness into harvest.

Corn prices often mark turning points around Memorial Day. Last year conditions were good and the market never got back to pre-holiday levels. Prices gapped higher after the holiday in 1988, when traders realized a major drought was underway.

There's potential for both gains or grief this year. The crop went in faster than normal, though not so fast that farmers are likely to keep planting more corn than original estimates. Forecasts for warm, wet weather don't look at all bullish, unless flooding in winter wheat is enough to keep corn float.

USDA releases its first ratings of the crop the afternoon when trading resumes after the holiday. If conditions are average or better, traders will likely believe "rain makes grain" and hammer prices lower.

Futures face potential downside to $3.50 into harvest, maybe lower if the crop faces few challenges. The best farmers could hope from a break now would be an early harvest low in July that begins to stimulate demand and limits expansion in South America. Weather trouble in Ukraine or China could also help prices if growing conditions remain good in the U.S.

Soybeans fell to new contract lows in the week before Memorial Day, despite a strong cash market for old crop. South America continued to suffer from labor problems that disrupted some shipments and movement, but estimates of the crop there edged higher just as more weak economic data emerged from China, the world's largest importer. Coupled with potential for another big U.S. crop, buyers felt no need to sign deals for new crop supplies. That kept 2015 bookings at a five year low.

Soybean prices don't normally break this early in the growing season, and historical trends suggested potential for a rally at some point during the growing season. But rules of thumb with beans don't have the force of law. Big speculators lightened up their bearish bet on beans this spring. If these hedge funds start selling again, any rallies that come may start from a lower level.

Wheat rallied 50 to 75 cents in May, depending on the market, a move that's nothing to sneeze at. Taking advantage of those gains may require some creativity, however.

The easiest method is selling increments on the way up. Putting a trailing stop with firm sell orders below the market is another way, as is buying put options. None of these ways will capture the best price. An at-the-money put, for example, costs about the same as the lower price a trailing stop would bring if triggered. But all three ways protect against falling prices if the rally ends, while trying to leave some upside open, too.

Strong basis at harvest could benefit those who sell off the combine. Storage into early winter can pay in wheat, but most farmers hold only until August, when dumping of grain ahead of fall harvest can make both basis and futures weak.

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