Welch on Wheat: Weekly Exports Saw Net Cancellations; Still Above USDA Target

Market Situation

Crop Progress. The condition of the U.S. winter wheat crop fell in the crop survey for May 28th. The percent of the U.S. crop rated good fell 3% with a 2% increase in fair and a 1% increase in excellent. The crop condition index score dropped one point to 340. The average index score for late May is 326.

Kansas continues to report the highest percentage of crop in the very poor and poor categories of the 18 states surveyed at 25%, up from 24% the week before. South Dakota reports 20% of its wheat in these two categories combined followed by Illinois at 18% and Texas at 17%.

Wheat rated fair in Texas increased 6% as very poor went down 1, good went down 4, and excellent went down 1. The Texas crop condition index fell 4 points to 316. The average condition score for this late in the Texas wheat crop year is 287.

Monday’s Crop Progress had the first condition ratings of the spring wheat crop. The percent rated good and excellent was 62%, lower than the beginning rating the last 3 years and about where the 2013 crop started off. In South Dakota, 23% is rated very poor and poor.

Weather. The Drought Monitor this week shows severe conditions and worse confined to southern Georgia and Florida, however, moderate drought conditions are expanding in the Dakotas and Texas. Rainfall of an inch and a half or better is forecast from southwest Texas to those driest areas of Georgia and Florida over the next 5 days. Only light precipitation is expected in the dry regions of the northern Plains.

The Oceanic Nino Index from the Climate Prediction Center is forecast to continue in mostly neutral territory this summer into early fall. The forecast model from the Australian Bureau of Meteorology is in El Nino Watch with about a 50% chance of El Nino developing later this year.

El Nino in Australia is associated with a drier than average winter (June to August) to spring (September to November) in eastern Australia. May and June are normal wheat planting months in Australia with harvest usually getting started in November.

Grain Use. With only a few days left to report in the 2016/17 marketing year, U.S. wheat export sales stand at 1.042 billion bushels, 101% of the 1.035 billion bushel target set by USDA. Sales for the week of May 25th were net cancellations, -1 million bushels.

The Texas wheat basis has improved since the first of the year. At the port of Houston the basis was -20 cents in January, improving to +50 cents in May. That supported an improvement in the basis in the average cash wheat price paid to the farmer, moving from -110 to -60.

Grain Commentary

Commitment of Traders. The Commitment of Traders Report was not available at the time of this report. The numbers will be reported early next week on the Master Marketer Facebook page.

The spread between the July and September Kansas City wheat futures contracts today is 18 cents, up 2 cents from the first of April. This amount is above full carry for that 60 day period (2 months x 6 cents per bushel/month = 12 cents). Any percentage of carry above 67% is generally considered a bearish commercial market indicator.

Marketing Strategies

2017 Wheat Marketing Plan. I priced the first 20% of the 2017 wheat crop at 480 on the best prices we had seen since last summer. The weather rally in early May provided an opportunity to add to pre-harvest sales. I am ready to price additional wheat prior to harvest then wrap up sales for the year around harvest.

Depending on the quality of the crop and the cost and availability of storage, there may be an opportunity to capture the carry in the market and a better basis on this year’s wheat crop. This can be accomplished by contracting to deliver grain later in the fall.

If I am still concerned about missing out on the possibility of higher prices later in the year, I can combine contracting with the purchase of call options. If this seems too expensive, consider buying calls and selling calls. This limits the upside potential but lowers the cost of the trade significantly. For more on these types of marketing strategies, see “The Minimum Price Contract” and “Using a Bull Call Spread” as part of our Risk Management Curriculum Guide.

Upcoming Reports/Events.
June 9 – WASDE and Crop Production
June 23 – Cattle on Feed
June 29 – Hogs and Pigs
June 30 – Acreage; Grain Stocks

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