The USDA reported planting intention estimates on Monday, March 31.  The highly anticipated report held little in the way of major surprises, but the current supply situation and high prices require market participants to look at this report with a great deal of scrutiny.  While it appears the marketplace has quickly forgotten about the bearish aspects of the report, market participants will continue to measure factors such as domestic and global demand and weather problems against the potential wheat production set forth by this report.  

If the estimates of planted acres for all wheat classes of 63.803 million acres holds true, US producers will have planted the largest area of wheat since the 98/99 crop year.  Additionally, 63.803 million acres would be an increase of 3.4 million acres from the prior year.  Soft Red Winter Wheat experienced the biggest increase in planted acres, while Hard Red Winter Wheat actually experienced a slight decrease in planted acres.  The estimates for winter wheat plantings should be fairly accurate, as those classes of wheat have been planted.  There is some question as to how much of this wheat could be tilled up in favor of planting other crops.  Some of this activity may occur in areas that have been damaged by heavy rains in the East or by dry conditions in the Southwest.  Most years this isn't a very common practice unless the planted wheat has suffered major damage, but the high price of soybeans and corn may entice producers to till up what they may normally keep.  I don't expect this practice to result in a major reduction of acres, but the market will be paying attention.  Spring Wheat planting intentions of 14.333 million acres is a sizeable increase compared to the 13.297 million acres planted in 2007. I was surprised to see an increase of 1 million acres. I contend that this figure will be reduced once the dust settles.  

Welcome to the start of weather markets for the current marketing year.  The market will continue to pay close attention to dry areas in the SW and wetness in many eastern areas. Little if any beneficial rain is expected to fall in the dry areas of the SW over the next 7 days. Eastern areas are expected to receive heavy rains and possibly more flooding over the next few days. Current crop conditions are rated below average and below last year’s crop conditions.  It will be 3 to 4 weeks before weather has any direct effect on Spring Wheat plantings.  Adverse weather in the winter wheat belt will definitely provide support to Spring Wheat.

Building domestic stocks to comfortable levels is going to take more than an above average wheat crop. A reduction in usage, especially exports, will be the primary factor in building domestic stocks. At this point, you can make a case for a reduction in exports based on the potential for an adequate global wheat harvest.  The bears are looking for global wheat production to exceed 640 mmt vs. 605 mmt last year.  While I expect wheat prices to erode over time, I don’t expect wheat prices to go back to the $4.50 to $5.50 range anytime soon.  It will likely take more than one year to build global stocks to comfortable levels.  07/08 global wheat ending stocks are calculated at 110 mmt.  If usage stays consistent, world stocks could possibly grow to 140 to 150 mmt at the end of the 08/09 crop season.  However, there isn’t any room for crop failures.  Additionally, many countries have begun to place more emphasis on building strategic reserves of many crops.  This practice may keep US export activity strong.  Russia, Ukraine and Kazakhstan expect to be big players in the export once again.  They have been restricting export activity to fight food inflation for quite some time, so we’ll see how this plan works out.       

Expect the funds to play a major role in the price action of all three wheat markets over the next few weeks. Selling will dry up on any signs of index fund buying in Chicago and KC. This would also support contracts in Minneapolis. Trends following funds will focus on the momentum of the market and key moving averages. If the funds are still interested in owning wheat, the market is going to have to trade above the current 100 day moving averages of 973 in the May contract in Chicago and 1005 ¾ in Kansas City May.  This type of buying could generate more buying and a lack of selling. If the funds don’t return as buyers, it is going to take adverse weather and/or an increase in export activity to keep these markets moving higher. Demand has been spotty the last few weeks as many major users are waiting for new crop winter wheat supplies. Any additional weakness and the funds will continue to liquidate in Kansas City and Minneapolis and possibly build more short positions in Chicago. This type of activity would be the final confirmation of the end of the wheat rally for the time being.

Do you have a question about this article? For a personal response within 24 hours, please email brian.henry@archerfinancials.com or call 1.877.377.7965.

This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of AFS is strictly prohibited.