Wheat continues to rally in the face of ample supply.  Recent wheat trade looks constructive and points toward higher futures prices.  However, basis levels should stay weak for the near term as users continue to grind through current supplies.  Do not expect the gains on cash wheat to mirror the gains in the futures market.

Additional strength in the corn and bean markets is required to keep the wheat market moving higher.  However, the wheat market continues to take its turn as the leader to the upside.  As concerns about the potential production problems in corn and beans become more apparent, I expect wheat to become more of follower than a leader to the upside.  The potential of profit taking on long wheat/short corn spread positions is also possible.  I do not believe this type of activity would cap the wheat market, but it would provide a level of selling that we have not seen recently.

The fundamental picture in wheat has one major bearish factor and a number of potential bullish factors.  The large global production weighed on wheat prices in late spring and early summer.  If global wheat trade slows down considerably, the market would find more selling.  Global wheat trade has been active and the US portion of this trade has been very good.  This week’s export sales were 931,600 mt, which was within estimates.  Much of this business had been done at an earlier date.  Do not expect wheat sales to continue at this level.  Wheat sales do not have to stay at this level to support the market.  If global wheat trade stays active and US based wheat remains competitive, these markets will have decent support.  The competitiveness of US wheat in the export market will also depend on whether the dollar can continue to strengthen or level off.  A weaker dollar would strengthen exports and should increase buying from the fund community.  I am not very confident in the financials and I expect to see money come back into commodities.

The supportive factors are surrounded by many questions.  Of late, the quality of the wheat in the Black Sea region has been in question.  Only time will tell the quality of wheat offered for trade, but a lack of milling wheat from this region would allow for more US business.  Dry conditions in the southern hemisphere are also a point of concern.  Australia has potential to grow 25 mmt, which is basically double last year’s production.  September is a key month and rains will be needed to reach this type of production.  The last few crop failures in Australia have developed in late August and September. 

I expect spring wheat to continue to lose ground to the other wheat markets; probably more so to Chicago than KC as the 20 to 25 cent premium to KC may result in profit taking on short Mpls long KC spreads.  Contracts in Minneapolis will continue to take their lead from the other markets as harvest continues and probably into late fall.  Quality is the key.  The quality of the HRW crop was adequate, which also helped alleviate concerns about tight spring wheat supplies.  If the quality of the HRW had been poor, there would be much more emphasis on buying spring wheat.  The export market is going to key to strengthening the basis.  However, the export market is likely to be much more competitive this year.  I expect the Canadian crop to have decent quality and I expect it to be for sale.

Spring wheat harvest is behind normal pace, but a lot of progress is being made this week as warm temps and dry conditions have allowed harvest to move into full swing.  As expected the crop is producing good yields, good test weights and low protein in the eastern areas of the growing region.  Eastern yields range from 60 to 80 bushels and protein levels range from 12.5 to 14%.  Western yields are ranging from 10 to 40 bushels with protein levels ranging from 14 to 16%.  However, test weights in western areas are coming in at 56 to 58 pounds.

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