Column: Have CBOT Wheat Futures Finally Reached the Top?

(Reuters) – The recent climb in Chicago-traded wheat futures to 17-month highs has lasted longer than most market participants probably expected, but prices faced a setback on Wednesday after surging to another high early in the session.

Investors have packed on the long positions in CBOT wheat over the last month, with a large focus on tightening supplies globally and challenges in some major exporting countries. But funds’ unusually bullish views leave wheat highly susceptible to a hefty sell-off.

Most-active futures ended at $5.77-3/4 per bushel on Wednesday, down 3.75 cents on the day, and the 18-cent spread between the session’s high and low was the largest for a single day in more than three months.

Commodity funds hold the most bullish CBOT wheat views for January since 2011, and their net long as of Jan. 14 was 29,787 futures and options contracts. That optimism ranks in the top 16% of all weeks since records began in mid-2006, and the position may have expanded by another 13,000 contracts through Tuesday.

The number of gross long positions that money managers hold in CBOT wheat is even more impressive at 117,055 as of Jan. 14, and that ranks in the top 3% of all weeks since 2006.

The Kansas City-to-Chicago spread was already abnormally negative a year ago at this time, but a huge K.C. discount has seemingly become the norm. Chicago finished 85.25 cents per bushel above Kansas City on Wednesday.

It is historically rare for Chicago wheat to trade at a premium to Minneapolis wheat, but that has been the case for more than 90% of the days within the last two months.

Wheat prices are also high compared with other grains. The most-active CBOT wheat contract on Wednesday briefly traded at a $2-per-bushel premium to CBOT corn. That spread has finished above that level only once (Aug. 17, 2018) since December 2014.

EXPORT HURDLES?

Wheat export prices in top supplier Russia hit the highest levels of the season last week on strong demand and last week’s move by its agriculture ministry, which proposed a grain export limit of 20 million tonnes for the second half of 2019-20.

The idea of Black Sea export limits is one of the quickest ways to rouse wheat bulls, as the high prices from August 2018 were largely supported by faulty rumors that Russia and Ukraine might seek limits. This time, the limit prospects are legit, which adds uncertainty to the market, but they still must be approved by the government.

However, analysts do not see exports reaching 20 million tonnes between January and June, with or without the limits. Russian grain exports for 2019-20 had reached 25.3 million tonnes by mid-January, just over halfway through the marketing year. That is down 16% on the year, including a 14% decline in wheat.

Wheat exporters in France, Europe’s largest wheat producer, are struggling to move product as month-old transport strikes over pension reform have disrupted rail services and port activities. Some French feed mills have suspended operations due to a lack of supply, and spot-month Paris milling wheat reached an 11-month high this week.

The logistical problems are especially disappointing after the second-largest French soft wheat harvest on record is set to boost exports. French farm office FranceAgriMer last week increased 2019-20 non-EU wheat exports to 12.4 million tonnes from 12.2 million forecast in December, up from 9.67 million a year earlier. Some of France’s primary non-EU customers, such as North African countries, could be forced to look elsewhere if the grain cannot make the journey.

FranceAgriMer predicts France will export a total of 21.8 million tonnes of wheat in 2019-20, including durum, and that is up 18% from 2018-19.

USA SUPPLY HOLE

Chicago wheat futures most generally represent the soft red winter (SRW) wheat market, just as the Kansas City contract represents hard red winter (HRW) wheat and the Minneapolis contract hard red spring wheat.

Halfway through the U.S. wheat marketing year on Dec. 1, national stocks stood at 1.83 billion bushels, down 9% from the previous year and the lightest for the date in four years. But the difference in supply this year versus last is highly variable by state, and thus by class.

In the top six SRW wheat states for which stocks data is available, wheat stocks as of Dec. 1, 2019 were at a 12-year low, down 34% from a year earlier. That also represents the largest year-on-year percentage drop in Dec. 1 wheat stocks since 1996 and the largest outright decline since 1978.

The 2019 winter wheat crop in those six states, which include the likes of Illinois, Missouri, and Ohio, was 17% smaller than in 2018. It did not help that the corn harvest in those states was down by the same degree, which further reduced the availability of feed grains.

SRW wheat plantings for the 2020 harvest are set to rebound 8% to 5.64 million acres, still the second-smallest area since 2010. Yields will also have the chance to recover from last year after particularly poor performances in Indiana and Ohio.

Nationally, winter wheat yield was the second-largest on record in 2019. But unless this year’s yield tops last year’s, production should be lower as all winter wheat plantings are expected to drop 1% from 2019 to a 111-year low. That is largely driven by a 3% cut in HRW acres to 21.8 million, the fewest in 35 years of records.

In the United States, winter wheat accounts for about 69% of the total wheat harvest. HRW wheat, primarily used in breadmaking, represents 61% of all U.S. winter wheat, while SRW wheat, a key ingredient in cookies and snacks, is 22% of the winter harvest.

SUPPLY VERSUS DEMAND

Stocks-to-use, a measure of both supply and demand, is seen shrinking on the year when excluding China’s massive inventory. Estimates from the U.S. Department of Agriculture suggest world stocks-to-use without China at 17.5% in 2019-20, down slightly from the prior year and the lowest in 12 years.

Isolating the major exporting countries would yield a 2019-20 stocks-to-use of 14.8%, down notably from 16.3% in 2018-19. That would be the tightest since 2013-14.

Stocks-to-use is always relatively large in the United States, though USDA has that falling to a five-year low of 45% by mid-year from 53% a year earlier. Outright U.S. stocks are also large, as some 44% of wheat held in major exporting countries is predicted to reside in the United States this year.