As with other commodities like corn, soybeans and other classes of wheat, the spring wheat market has found prices sliding down at the end of the year heading into 2013.
“The uncertainties surrounding the fiscal cliff, investment fund rebalancing and basically non-fundamental, non-market influences have put the market into a tailspin,” said Jim Peterson, marketing director for the North Dakota Wheat Commission.
“These issues are driving it through some key support levels in the upper $8 range in Minneapolis spring wheat futures and pushing it down to the next level of support which seems to be $8.50 for Minneapolis and $7.50 for Chicago wheat,” he said. “So we’ll see in the front half of January if that level of support is able to hold in the markets.
“As of right now it seems to be wanting to set a bottom at these levels, but to strike out and move higher and recover some of the losses may prove to be challenging unless we get adverse weather for the U.S. hard red winter wheat crop or bad weather for South American corn and soybean crops.”
Without that, Peterson feels that for the most part, buyers are pretty relaxed and not overly concerned with supply shortages that have been talked about in the market for months now.
“I think we have hit a point where the market got tired and has traded down to find some levels of support and to buy demand,” he said.
Currently the funds can be your friend or foe, according to Peterson, adding that a lot of the fund investment in the market is due to the drought that helped propel the market higher for much of 2012. Now, there’s discussion that some of these funds may be looked as having more profit opportunities in the stock market as opposed to the commodity market.
“It may take another weather event to draw them back into the futures market,” he said.
The other challenge for significant commodity price recovery, is that more people are anticipating the U.S. dollar strengthening in the short term, and that can be viewed as more negative for commodity values, according to Peterson.
“It’s certainly beneficial to producers on the input side, but more negative for commodity prices,” he said.
Although much of the current market situation is driven by outside factors and not fundamentals, Peterson said there are still a lot of fundamental issues that are positive for prices going forward, but the cash basis will have to appreciate to offset what the futures decline has done.
Some of those fundamental issues are cold weather concerns in parts of Russia for next year’s wheat crop and quality issues in Argentina and Australia seem to be a little worse than earlier anticipated. Those could potentially be beneficial for U.S. wheat exports.
“U.S. wheat is currently the cheapest priced wheat in the world market,” Peterson said. “Offers form Russia have finally dried up so we should start picking up more world demand.”
Another big issue is the condition of the U.S. hard red winter wheat crop.
“Until it breaks dormancy later this winter, condition of the crop is a concern, but it’s hard to put a market value on what that concern should be priced at,” he said, adding there’s still some time for improvement, but the crop is still vulnerable to Arctic weather over the next few months. “Those are fairly positive factors, but the market is trying to reassess its value as we start 2013.”
Current local prices for hard red spring wheat range from $7.50-$7.90 with an average of $7.75. To put that in perspective, local prices had been $8.75 or even higher in some locations in early November and were $8.50 in mid December, so they’ve dropped about a dollar.
“Prices have fallen below producer objectives so I would expect tight producer holding of supplies, especially with the uncertainty of the hard red winter wheat crop down south, and producers hoping to see a little price recovery in January,” Peterson said.
On the export side, the current export pace has been improving. Overall U.S. wheat exports stand at 686 million bushels compared to 715 million a year ago at this time – down just 4 percent. Earlier this year exports were as much as 10 percent behind, so the pace is accelerating somewhat.
USDA is still projecting 1.05 billion bushels in sales for its export goal for this year which puts the current pace at 65 percent of USDA’s goal.
Looking at the two classes grown in this region, hard red winter wheat sales stand at 259 million bushels, which is only 5 percent behind last year. But of more concern is it’s only at 55 percent of USDA’s export goal for this year, so more demand is needed.
Hard red spring wheat sales total 166 million bushels at this time which is trending about 11 percent behind a year ago. But, on a positive note, that’s 71 percent of USDA’s export goal.
HRSW has seen a pick up of demand into north Asia over the last short period, although it’s down slightly in south Asia. However, some of that is due to buyers waiting out the Australian harvest.
“Hopefully over the next month or so we’ll see a pick up of demand in that region,” Peterson said. “We’re already facing more competition from Canada in Indonesia.”
In other regions, HRSW sales in the European Union are down from a year ago due to an economic slowdown in Spain which is typically a good customer.
“Some mills there are sacrificing quality in lieu of the economic conditions. Hopefully those economic conditions will stabilize in the coming year to get them to come back to U.S. hard red spring wheat,” Peterson said. “Other than that it’s a wait and see situation. Hopefully we’ll see more demand materialize.”
The market is anticipating the Jan. 11 USDA survey of the 2013 US. hard red winter wheat crop. Peterson noted a private survey is already hinting at a 2 percent increase in plantings up to 42 million acres. While that’s a higher trend, it’s about a percent lower than what analysts were expecting in August.
“The dry conditions in August kept acres from being more than what they were expecting earlier, “Peterson said.
“But even if we see higher planted acres, poor weather may limit the harvested area.”