Excluding the Minneapolis July contract, all other wheat contracts are caught between the prospects of a large 2008 global/domestic wheat crop and correcting a two-month sell off.  As the domestic Winter Wheat harvest approaches, the market is becoming less concerned with the current tight supplies.  

The market continues to have a difficult time sustaining rallies.  The wheat market is trading on its own merits, which differs from corn and beans as crude oil continues to provide underlying support to these markets.      

While the prospects of this crop are high, building stocks to comfortable levels could and most likely will be a multi-year process.  Not only do we need to get the current crop harvested in good shape, but we also need wheat prices that will entice producers to continue to grow wheat.  The battle for acres will not play out until fall, but it will be a supportive factor if corn, beans and other alternatives continue to trade at lofty levels.  The USDA estimates 07/08 ending stocks of 242 m bushels.  This equates to a 10.2% stocks to use ratio.  The US has not seen a stocks-to-use ratio that compares to the current situation since the 95/96-crop year, which had a stocks-to-use ratio of 15.8%.  The ending stocks for that crop year were 376 m bushels.  That's a much better supply than 242 m bushels, but tight none the less.  The average farm price for that 05/06-crop year was $4.55, the best prices seen in years.  High prices did create a slight increase in 96/97 production.  Imports saw a slight increase, but exports saw a sizeable decrease.  Given the potential size of the global wheat crop, expect the 07/08 wheat exports to be reduced from the prior year.  Further weakening of the US dollar and/or a lack of production in Australia would be two key reasons that may allow US exports to remain high.  Due to the current high prices in corn and the other feedstocks, there is a good possibility of seeing an increase in the amount wheat used for feed.

While I believe the wheat market does have value near these levels at least until harvest starts, the possibility of increasing supplies will continue to weigh on the market.  Another factor that may weigh on the market through the summer is Index fund activity.  Some estimate that the Index funds, which are long only funds, may have as many as 190,000 long positions in Chicago wheat.  They are also net long Kansas City, but to a lesser extent.  They generally do not participate very much in Minneapolis.  I am concerned that this group may look to liquidate a large portion of these longs.  Further price weakness and a rally in the US dollar may result in heavy liquidation of longs in Chicago, which would also weigh on the contracts in Mpls.  It depends on whether or not these funds find a better haven for their assets.  This type of selling would result in a very good buying opportunity as I do not expect wheat prices to continue to trade above levels experienced before June of 2007 until production catches up to demand and supplies increase.  Population growth and better diets in many foreign countries are going to continue to increase the use of staple commodities.

I am concerned about the lack of spring wheat supplies continuing through this marketing year.  USDA estimated the spring wheat carry out at 64 m bushels.  Over the last 15 crop years the carry out has ranged between 233 m bushels and 106 m bushels.  Generally, spring wheat supplies do not fall below 130 m bushels.  Spring wheat plantings, which are 94 percent complete, should see a slight increase in acres.  I do not believe this increase will be large enough to raise spring wheat stocks to comfortable levels.  That fact that many spring wheat-growing areas are currently experiencing dry conditions is starting to raise concerns.  If dry conditions continue, expect the support to come into the Sept contract.  Expect the new crop basis to be bid also.

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