Posted by: usset001 | July 30, 2010

Is the bull market in wheat prices real?

Minneapolis December Wheat Futures

In late May I posted comments on the bear market in soybeans. I made the point that a true bear market should reflect three trends: (1) declining futures prices, (2) a weakening basis, or cash prices falling even faster than futures prices and, (3) widening carrying charges (or decreasing inverses) in interdelivery spreads. Based on tightening spreads and an increasing basis, I concluded that I was skeptoical about the bear market in soybeans.

We have a similar story occurring today in wheat, but this time from a bullish perspective. The wheat futures market is on a tear. For example, December spring wheat futures (shown) are up about $1.50 per bushel, or nearly 30%, in the month of July.

The question for today is this: Does the action in the wheat spreads and basis support the bullish tone of the futures market?  A true bull market should reflect three trends: (1) increasing futures prices, (2) a strengthening basis, or cash prices rising faster than futures and, (3) narrowing carrying charges (or increasing inverses).

Minneapolis September - March Spread

The evidence is mixed. The board is higher. Spreads have tightened modestly. The Minneapolis September-March spread, for example, narrowed from a 35 cents carry to about 31 cents during the mnonth of July. Actually, the carrying charges were so large at the start of July, it was hard to imagine any direction to the spreads other than a narrowing of the carrying charges.

Basis signals are something completely different. The spring wheat (and hard red winter wheat) basis is in the tank. My accompanying chart shows the nearby wheat basis in Kindred, ND. It started the month at 40 cents under and currently stands at 90 cents under the September contract. I’m not picking on Kindred – the example shown here is indicative of all of spring wheat country. By the way, I would normally expect a weakening spring wheat basis in the month of July, but not 50 cents per bushel.

Nearby Spring Wheat 14% Pro Basis, Kindred, MN

Until I see a fundementally stronger cash market, as indicated by a stronger wheat basis, I’m not going to let myself buy into this bull market.


Responses

  1. Ed,

    How much of the basis decline is associated with quality issues with this year’s wheat harvest? I only have anecdotal evidence but it seems that merchants bid the average quality of wheat in the cash market but report bids to AMS and others that are at a standard #1 or #2 grade. In other words, price bids for wheat over time do not reflect a constant grade and protein content. Am I way off base on this?

    Scott

    • Scott,
      I made a few calls to spring wheat country to make certain my reply accurately reflected the current market. First I want to note that the 90 under basis I quoted last week is more like 100-120 cents under the Minneapolis September contract for new crop wheat. Wheat is moving fast and furious – bull markets can do that.

      The cuurent bid of about 110 cents under reflects #1HRS, 14% protein content. New crop has arrived in the Red River Valley and harvest is progressing quickly. Test weights are generally better than 60 lbs and yields are very good. Protein content is running better than year ago, and this is reflected in less punitive protein discounts. Many elevators are currently discounting about 70 cents per 1% protein from 14% to 12% protein (i.e. the basis for 14% is 110 under, 180 under for 13% and 250 under for 14% pro). These are sharp discounts but not nearly as sharp as the 100-125 cent per 1% seen one year ago.

      A Red River Valley wheat basis of 110 cents under is very wide by any measure – the records I keep since 1989 indicate a HRS wheat basis at harvest (mid to late August) of 30 cents over to 60 cents under. Why the exceedingly wide basis this year? We have a confluence of significant events, starting with a very large carryover of HRS wheat from 2009, a rapid run-up in prices that is generating a great deal of pricing interest and an early start to the 2010 harvest (the ND crop was planted early this year).

      The confluence of events will eventually pass and I predict more “normal” basis levels by Thanksgiving or year-end. If the problems in Eastern Europe persist, we might even see some overs some time in the first-half of 2011.

  2. I have been pricing into the H2011 futures on HRS. I hope to see some basis improvement. But will have to take the hit on low protein.


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