While the 2010 harvest will be a write-off for many WA producers, the good news is that wheat prices for next season have started to take on a leadership role. 2011 CBOT wheat futures contracts last week again challenged contract highs at just under $8/bu.
During the early stage of the current rally, prices were driven by immediate needs; to replace Russian grain exports. Since then concerns about corn yields started to take centre stage. But now widening dry conditions throughout the US Hard Red Winter (HRW) wheat-belt and thoughts that not enough winter wheat has been planted has started to drive the grain complex.
Wheat is now completing head on with corn, soybeans and cotton to attract its fair share of northern hemisphere spring plantings. This is a bullish scenario.
On top of this, concerns about the impact of a strengthening La Niña is one of the reasons traders seem more concerned about the HRW crop than the SRW crop that’s heading into dormancy. One of the impacts of La Niña is the potential for above-normal temps and below-normal precipitation in HRW country, while the weather phenomenon normally brings at least normal precipitation into the Ohio Valley and northern SRW production areas.
Traders are anxiously waiting to see USDA’s supply/demand estimates this week. While a smaller crop estimate is expected, it’s the usage side that will likely be more important to near-term price direction. Any declines on the demand side of the balance sheet would suggest prices have hit a level that is starting to ration use. And that could be enough to trigger a short-term corrective pullback. But there are likely to be plenty of buyers — in both futures and the cash market — if there is a price pullback, which limits near-term downside price risk.