Wheat Supplies Tight, Driving Grain Futures Up

Chicago SRW wheat futures are on the upswing in early October, with December 2016 contracts up over the $4.00 level, and March, 2017 prices trading around $4.23.

One big reason for the run-up -- a U.S. Department of Agriculture report last week showed lower spring wheat crop estimates, down to 534 million bushels from an earlier forecast of 570 million bushels.

Analysts say that with a weak harvest for quality wheat, thanks to adverse weather conditions in Australia, Canada and France that negatively impacted quality wheat supplies, there is no stronger demand, yet with lower crop levels.

Currency issues are also impacting wheat supply. "The key factors on wheat prices remain the strong dollar and quantity of wheat," says Rich Clifford, managing director at fractal, SA, a Swiss-based market data analytics firm. "Up until recently, we were operating with a large amount of wheat in the U.S., which meant that farmers were being discouraged from using it as a feed in favor of corn."

Going forward, Clifford sees "downside risk" for gains, including wheat, corn, beans and soybean oil until "early to mid-December."

"At that point, our programs are pointing to an extended -- perhaps very overdue -- bullish run throughout the whole of 2017 and into the first half of 2018," he says. "We have seen an eight-year move in wheat where prices have been largely one directional. Between a possible 'dead-cat bounce' and pressure on foreign currencies -- pushing the dollar and dollar denominated commodities higher as a result -- the risk to long-term wheat positions is slowly shifting to the short side."

Further favoring wheat prices is a complaint filed by the U.S. Trade Administration to the World Trade Organization, regarding China's alleged $100 billion of subsidies for rice, wheat and corn production in 2015 and in previous years. "The initial filing does not specify details, but does come ahead of formal discussions with the Chinese government," states Panjiva, a global trade data analytics firm, in an email to TheStreet. "Given the timing, this appears to be more a political move ahead of a vote on the Trans-Pacific Partnership, and the elections rather than being anything the U.S. government hopes to complete before year end."

Panjiva notes that wheat exports may be the area where U.S. farmers have the most to gain, and indeed the need for it. "Our data shows exports in the 12 months to July 31 fell 2% on a year earlier, despite an 18.8% recovery in the month of July," the company states. "Ironically this includes a 163% increase in Chinese purchases, yet they still only accounted for 3.3% of U.S. exports in the past 12 months. Until late 2013 Chinese imports were 6.1 times higher those of the past 12 months, suggesting room for U.S. farmers to sell more under the right conditions."

Any gain for farmers and investors could be muted by wheat harvest activities in overseas bourses - especially in Russia. "What happened in wheat over the past few years is that Russian exports began to dominate the world market," says Peter Zaleski, an economics professor at the Villanova School of Business. "In response, U.S. stockpiles increased. That led U.S. farmers to cut back on their acres of wheat planted. With planting reduced, prices could go higher, but if Russia continues to supply the world, any upward pressure on prices due to the U.S. cutback will be tempered."

Grain experts say that corn prices are also influencing the wheat outlook.

"Feed usage is a big story this time of year, and with wheat trading below $4.00, livestock feeders look to switch to wheat," says Peter Mooses, a senior market strategist at R.J.O. Futures, where he trades futures and options and specializes in the grains markets. "The prices we have seen in Chicago Wheat were at ten-year lows and this area of consolidation on the technical charts hasn't given us any direction."

Mooses says the market has shown us that prices should trade between $3.85 and $4.15 with current conditions.

"Weekly crop progress reports show that wheat has been coming in nicely and weather conditions haven't been affecting production levels of the crop," he adds. "Weekly exports could provide some small market moves but typically the monthly and quarterly reports are the market movers. With the next quarterly data release scheduled for January, price targets can be set. In my estimate, we should end the year in the $4.35-$4.45 range, as bottoms have been established and wheat usage will go up."

Heading into 2017, wheat specialists see several key factors impacting prices. "Protein levels and overall yield are the biggest factors that impact wheat prices going into 2017," says Mike Ferretti, CEO of Great Harvest Bread Company.

With supply tight and myriad other factors working in wheat investors' favor, prices are popping this month - expect grain futures trackers to get in on the action.

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