Last year's poor weather conditions tightened world supplies to their lowest levels since the 1970s, after a freeze and flooding cut the U.S. crop, dryness in Europe and the Ukraine dropped their outputs, and a second year of drought in Australia chopped its production 40% below expectations. And expanding U.S. and world plantings and improved crop conditions in the Northern Hemisphere have been the market's focus over past six to eight weeks.  

Because of this situation, an expanded look at the U.S. winter wheat prospects-along with the potential for 2008 spring and durum crops-is appropriate ahead of the first U.S. winter wheat crop report on May 9. We also will be offering some initial output projections for the major wheat exporting nations and the possible impact these crops will have on world supplies, since the U.S. Department of Agriculture (USDA) will be issuing its first 2008/'09 world wheat supply/demand estimates that day.

Dryness in the U.S. Plains states last fall curtailed U.S. hard red seedings (-440,000 acres). But higher market prices boosted soft red planting (+2.05 million) in the eastern U.S and white wheat's area (+230,000) in the Pacific Northwest, resulting in a 6% rise in U.S winter wheat plantings for this year. After a sporadic winter-in which moisture in the western areas of the Plains remained below normal, while the central and eastern areas of the country had adequate-to-abundant rainfall-this spring's U.S. winter wheat good/excellent ratings have stabilized in the 45%-47% range. This total is about 10% lower than last year's cumulative level for the crop. However, last year's heavy rains at harvest and larger impact from last spring's freezing temperatures that cut crop yields weren't known at this time last year. Interestingly, this year's top two categories are only 5%-6% below the five-year average for this date.

Looking at specific states, this year's Plains' dryness shows up in sharply lower TX and CO ratings-while KS and NE conditions are even slightly better than last year. The crop isn't in the bin, but with yield prospects at or slightly better for the U.S. hard red crop, we are projecting a 945 million output for this variety next week. With this year's soft red conditions in its major states sharply higher than last year (IL  56% vs. 25%, MO 50% vs. 5%, IN 67% vs. 34% and AR 45% vs. 15%) and this year's 24% jump in seedings, soft red's U.S. output could jump to 540 million bu. (up 182 million from last year). With seedings and conditions up slightly in the Pacific Northwest, next week's white wheat crop could be 225 million bu, up 29 million from 2007. Overall, we expect the USDA's May winter crop to be 1.711 billion bu., with a 45 bu. yield. It will be interesting to see what the industry wheat tour thinks of the Kansas crop when it crosses the state on Tuesday to Thursday next week. 

Despite below-normal temperatures this spring, wheat seeding in the Northern Plains has stayed near its five-year average pace-with 34% of this year's expanded area completed through  April 27 vs. a 40% average rate from 2003-2007 and 28% last year. Last winter's record spring wheat prices prompted producers to signal a 1 million acre increase in spring wheat and 480,000 in durum planting intentions on the USDA's survey in March. No official spring wheat and durum production levels will be made until July, but the USDA likely will use trendline yields for each crop to pencil in a total crop of 600 million (513 million spring and 87 million durum) from this region, to project an overall 2008 U.S. wheat supply of 2.311 billion bu. Variable soil conditions across the Northern Plains and Minneapolis new-crop wheat prices falling $4 per bu. over the last six weeks could mean some of these projected acres could slip back into soybeans, sunflowers or other small grains (such as oats and barley). However, these shifts in seedings won't be known until this summer's USDA acreage report is released on June 30.

With most of the world's major wheat exporting and consuming countries announcing 3%-7% higher wheat seeding levels for the 2008/09 crop year, which begins this summer, a significant rebound in world wheat output is expected to 651 mmt-up 45 mmt from last year. Much improved prospects are expected in the European Union (up 15%) and former Soviet Union (up 8%). Argentina's recently harvested crop is projected 1 mmt larger than a year ago. Stats Canada announced that 2008 wheat seedings could jump 16% to more than 25 million hectares on recent intentions. Australia also remains quite optimistic that its output will jump 10 mmt to 11 mmt over this year's drought-impacted crop, because La Nina in the Pacific Ocean is expected to wane this summer. However, this year's world consumption also will increase sharply as feed utilization and domestic demand recover dramatically-after being severely curtailed last year. Overall, 2008/09 world ending stocks will likely rebound to 129 mmt from this year's 112.5 mmt level-but wheat's world supply tightness won't decline much with the USDA's stock/use ratio only increasing 2 points to 20.3%. 

Using these U.S. and world crop prospects, the USDA's first 2008/09 ending stocks level will be 454 million bu.-up about 200 million from this year. These will be adequate supplies unless one of our world export competitors has a crop problem (as occurred last year), so keep abreast of this year's global crop situation. However, downside risk to $7.30-$7.50 in Chicago and $7.90-$8.20 in KC still exist during the upcoming harvest. Hold cash new-crop sales at 55%-60% and any future hedges on 10%-15% of the new crop, to cover at the above levels this summer. Wheat's upside potential will be determined by U.S. and world weather, as well as the strength of corn and soybean prices. Overhead resistance comes in at $9.00-$9.75 in Chicago and $9.60-$10.25 in KC as likely new sell points.

The information contained in this report reflects the opinion of NARMSinc and should not be interpreted in any way to represent the thoughts of R.J. O'Brien, any of its affiliates, nor any of its employees. Futures and commodities trading involve significant risk and may not be suitable for every investor. Information contained herein is strictly the opinion of its author and is intended for informational purposes and is not to be construed as an offer to sell or a solicitation to buy or trade in any commodity or security mentioned herein. Information is obtained from sources believed reliable, but is in no way guaranteed. Opinions, market data and recommendations are subject to change at any time. Past results are not necessarily indicative of future results. Charts are developed by NARMS from USDA, other public data and proprietary models unless otherwise noted and credited.