Wheat’s time is now -- almost

Winter weather rallies are hard to sustain unless they’re the real deal

By Bryce Knorr

Wheat is on the clock. Whether its draft yields an all-star or a bust should be known over the next month
or two.

On average in years of higher prices, these spring rallies don’t actually give way to sharply higher prices.
Futures tend to slide into the end of April, rebound if USDA’s first survey of yields confirms losses, then
rally again in the summer when bushels off the combine disappoint.

A flexible strategy is needed both to protect the downside and take advantage of rallies. This could mean
covering sales with September call options in late April or early June, or buying short-dated puts to
capture some profits on the way down.

Using options won’t be without cost. Though most of these positions won’t last more than two or three
months, the market has gotten more expensive since I recommended covering old crop sales with May
$5 calls back in October. Those positions reflected a cost of only 14.75 cents. They settled at 11.875
cents Tuesday, after almost four months of time value decay. Prices are barely changed, so the options
should have eroded money. But volatility has taken off, helping them maintain value.

Indeed, the volatility index for wheat shows just how much of a weather market this is. Volatility closed
Tuesday above 25%, higher than the VIX in the stock market. While the wheat reading isn’t all that
unusual for the grain market. It’s based on different factors. The VIX for stocks typically reflects the
relative value of put options because investors are worried about falling prices. In grains, VIX rises
typically on strength in call options, because traders want to be in position for bull markets. Not
surprisingly, the CBOT raised wheat margins Tuesday after the close.

Seasonal trends for new crop suggest an initial top about now that doesn’t get taken out until spring in
bullish years. Charts look toppy, with a bearish reversal in SRW and divergence with the RSI, which didn’t
make new highs. HRW charts arent quite as bearish, but are also in jeopardy.

Most of the risk production-wise is with HRW, making SRW the choice for hedging now – and it’s the only
choice for options. To be sure, production risk abounds. Crop ratings at the end of January shaved
another 2.5 bushels per acre off my forecast of winter wheat yield potential, with the crop now potentially
smaller than 2017. These winter ratings can improve with moisture, and some precipitation is in the
forecast for the southern Plains over the next two weeks.

I previously recommended being 30% hedged on new crop winter wheat at $5.35 basis July SRW for
liquidity. Growers who aren’t at that level can ease into cash sales or hedges, or consider May SRW puts
for a break into April. Given the weather risk it’s probably still too early to get up to 50% covered just yet.

Spring wheat growers likely have more time to pull the trigger. Last week’s drought monitor said even
more spring wheat is in drought than winter wheat. That’s why Minneapolis September is in a modest
uptrend while March is battle to hold lows at $6. USDA’s March 30 planting intentions report is the
market’s next inflection point; a rally to buy acres would be an opportunity to step up hedges.
Wheat Supply & Demand Table
USDA Bryce
2016 2017 2018 2017 2018
Area
Planted 50,104 46,012 45,000 46,012 46,766
Harvested 43,890 37,586 38,300 37,586 38,336
Yield 52.6 46.3 47.4 46.3 45.2
Beginning stocks 976 1,181 935 1,181 1,004
Production 2,309 1,741 1,815 1,741 1,734
Imports 118 155 135 150 134
Supply, total 3,402 3,076 2,885 3,072 2,872
Food 955 955 950 954 953
Seed 61 62 62 62 64
Feed and residual 157 100 110 100 114
Domestic, total 1,167 1,117 1,117 1,116 1,180
Exports 1,055 950 950 953 864
Use, total 2,222 2,067 2,072 2,069 2,045
Ending stocks 1,181 1,009 813 1,004 877
Average price $3.89 $4.60 $4.60 $4.70 $5.07
Stocks to use ratio 53.1% 48.8% 39.2% 48.5% 42.9%
Ave. Nearby Futures
Chicago $4.68 $5.36
Kansas City Hard Red $5.02 $5.58
Minneapolis $5.70 $5.96
Top Third of Price Range
2017 2018
Chicago $4.19 to $4.68 $5.36 to $5.85
Kansas City Hard Red $4.53 to $5.02 $5.58 to $6.11
Minneapolis $6.78 to $7.32 $5.96 to $6.51
 Beginning Total Domestic Ending
Stocks Production Supply use Exports Total Use stocks
Soft Red Winter
08-09 55 614 702 332 199 531 171
09-10 171 404 607 256 109 366 241
10-11 242 237 508 228 109 337 171
11-12 171 458 662 313 163 477 185
12-13 185 420 623 306 193 499 124
13-14 124 565 709 311 285 595 114
14-15 113 455 581 295 133 428 153
15-16 154 359 531 255 120 375 157
16-17 157 345 535 228 92 320 215
17-18 BK 215 292 540 239 101 340 200
White
08-09 37 255 300 100 136 236 64
09-10 64 237 310 88 143 231 79
10-11 80 275 362 95 182 277 85
11-12 85 314 407 127 216 343 64
12-13 64 259 330 92 175 267 63
13-14 63 268 339 117 171 289 50
14-15 50 224 284 91 146 217 67
15-16 67 221 294 73 147 220 74
16-17 74 286 367 98 163 262 105
17-18 BK 105 258 370 95 183 278 92
Durum
08-09 8 84 130 81 24 105 25
09-10 25 109 171 84 40 124 47
10-11 35 106 173 95 43 138 35
11-12 35 50 122 70 27 97 25
12-13 25 82 143 91 29 120 23
13-14 23 62 129 77 30 107 22
14-15 22 53 120 58 36 94 26
15-16 26 84 143 86 29 116 28
16-17 28 104 162 102 24 126 36
17-18 BK 36 55 138 84 23 107 31
Hard Red Spring
08-09 68 512 625 273 210 483 142
09-10 142 548 731 282 214 497 234
10-11 234 570 832 309 339 647 185
11-12 185 398 619 223 245 468 151
12-13 151 505 699 302 232 534 165
13-14 165 490 733 317 247 564 169
14-15 169 556 791 307 271 578 213
15-16 212 568 828 304 252 556 272
16-17 272 493 807 251 321 572 235
17-18 BK 235 385 662 230 259 489 173
Hard Red Winter
08-09 132 1,035 1,167 472 448 919 248
09-10 248 920 1,175 420 370 790 385
10-11 385 1,018 1,404 403 616 1,018 386
11-12 386 780 1,167 452 398 850 317
12-13 317 1,000 1,339 615 381 996 343
13-14 343 747 1,109 426 449 872 237
14-15 237 738 984 421 270 391 294
15-16 294 830 1,130 458 226 685 446
16-17 446 1,082 1,533 488 455 943 589
17-18 BK 589 750 1,344 478 391 869 476
 Illinois Winter Wheat Yields
80
75
70
65
60
55
50
45
40
35
30
10/29 12/29 02/28 04/30 06/30

Last year This year

85
Ohio Winter Wheat Yields

80

75

70

65

60

55

50

45
10/29 11/29 12/29 01/29 02/28 03/31 04/30 05/31 06/30

Last Year This Year

 Kansas Winter Wheat Yields

55
50
45
40
35
30
25
10/29 11/29 12/29 01/29 02/28 03/31 04/30 05/31 06/30

Last year This year

40
Oklahoma Winter Wheat Yields

35

30

25

20

15
10/29 11/29 12/29 01/29 02/28 03/31 04/30 05/31 06/30

Last Year This Year

 South Dakota Winter Wheat Yields
46

44

42

40

38

36

34

32

30
10/29 11/29 12/29 01/29 02/28 03/31 04/30 05/31 06/30

Last Year This Year

Nebraska Winter Wheat Yields

55

50

45

40

35

30
10/29 11/29 12/29 01/29 02/28 03/31 04/30 05/31 06/30

Last Year This Year

 Montana Winter Wheat Yields
55

50

45

40

35

30

25

20
10/29 11/29 12/29 01/29 02/28 03/31 04/30 05/31 06/30

Last Year This Year

U.S. Winter Wheat Yields

52
51
50
49
48
47
46
45
44
43
42
10/23 11/13 12/4 12/25 1/15 2/5 2/26 3/19 4/9 4/30 5/21 6/11 7/2
Last Year - National Model State-by-State yields
National Yield Model "Last Year -- State Model"
Snow Cover

+
 Total Ending Stocks of Major Exporters
120,000

100,000

80,000

60,000

40,000

20,000

-
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Includes U.S., Argentina, Australia, Canada, EU and FSU

Total Wheat Exports

(Year to Date)
1400 100%
90%
1200
80%
1000 70%
800 60%
50%
600 40%
400 30%
20%
200
10%
0 0%

Total Commitments % of USDA Forecast

 Accumulated Wheat Export Shipments
1,000 80%
900 70%
800
60%
700
600 50%
500 40%
400 30%
300
20%
200
100 10%
- 0%

Total Shipments % of USDA Forecast

Hard Red Winter Wheat Exports

(Year to Date)
800 100%
700 90%
80%
600
70%
500 60%
400 50%
300 40%
30%
200
20%
100 10%
0 0%

Total Commitments % of USDA Forecast

 Soft Red Winter Wheat Exports
(Year to Date)
350 120%
300 100%
250
80%
200
60%
150
40%
100
50 20%
0 0%

Total Commitments % of USDA Forecast

Hard Red Spring Wheat Exports

(Year to Date)
400 100%
350 90%
80%
300
70%
250 60%
200 50%
150 40%
30%
100
20%
50 10%
0 0%

Total Commitments % of USDA Forecast

 White Wheat Exports
(Year to Date)
250 120%

200 100%

80%
150
60%
100
40%
50 20%

0 0%

Total Commitments % of USDA Forecast

Weekly Wheat Export Inspections

35,000

30,000
Thousand bushels

25,000

20,000

15,000

10,000

5,000

2016-17 2017-2018 5-Yr. Avg.

0
J J A S O N D J F M A M

SOURCE: USDA
 KANSAS CITY JULY FUTURES
700 390

380
650
370

600 360

350
550
340

500 330

320
450
310

400 300
8/1 10/1 12/1 2/1 4/1 6/1

Bull Year July 2018 Normal Year

MINNEAPOLIS SEPTEMBER FUTURES Normal

Year
650 410
630
400
610
590
390
570
550 380
530
370
510
490
360
470
450 350
1/4 2/4 3/4 4/4 5/4 6/4 7/4 8/4
Bull Years Sepember 2018 Normal Years
 CHICAGO JULY FUTURES
650

600

550

500

450

400

350

300
5/25 7/25 9/25 11/25 1/25 3/25 5/25

Bull Non-Bull Jul-18

Chicago July Wheat Futures Seasonal Trend

Start Date +1 Week +2 Weeks +3 Weeks +4 Weeks +5 Weeks +6 Weeks

2/16 2/23 3/2 3/9 3/16 3/23 3/30
Ave. Gain/Loss 0.6 (2.1) (1.8) (0.4) (3.4) (7.2)
% Up 22/43 18/43 16/43 15/43 17/43 17/43
% Down 21/43 25/43 27/43 28/43 26/43 26/43
Ave. Gain - Up year 12.5 20.3 23.6 39.6 25.8 27.3
Ave Loss - Down Year (11.9) (18.2) (16.9) (21.8) (22.5) (29.7)
Biggest Gain 60.0 148.0 166.0 336.0 139.0 108.5
Biggest Loss (41.0) (77.3) (95.3) (173.5) (167.0) (157.0)

This table shows the typical seasonal pattern at weekly intervals from the start date, based on
average daily futures prices from 1974-2016. Gains and losses are based on the difference
between the closing price on the start date and the closing price on the weekly date shown.
 Commitment of Traders - Chicago Wheat
150000 $7.00

100000 $6.50

$6.00
50000

nearby futures
net position in contracts

$5.50
0
$5.00
-50000
$4.50
-100000
$4.00

-150000 $3.50

-200000 $3.00
1/15 3/15 5/15 7/15 9/15 11/15 1/16 3/16 5/16 7/16 9/16 11/16 1/17 3/17 5/17 7/17 9/17 11/17 1/18

Source: CFTC

Index funds Hedge funds Futures

Commitment of Traders - K.C. Wheat

100000 $7.00

80000
$6.50
60000 nearby futures
net position in contracts

$6.00
40000

20000 $5.50

0 $5.00
-20000
$4.50
-40000
$4.00
-60000

-80000 $3.50
1/15 4/15 7/15 10/15 1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 1/18

Source: CFTC

Index funds Hedge funds Futures

 Commitment of Traders - Minneapolis Wheat
(Futures and Options Combined)

25000
$8.00
20000

15000 $7.00
Contracts

10000
$6.00
5000

0 $5.00

-5000
$4.00
-10000

-15000 $3.00
1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17 1/18

Large traders Nearby Futures