How far could the rally in spring wheat futures go?
Societe Generale reckoned that the rally in spring wheat,
which saw spot July futures on Monday touch a fresh two-year high of $6.75 a
bushel, has gone far enough.
At least, when compared with prices of Chicago-traded soft
red winter wheat, the world benchmark, but a far lower protein variety, often
used in feed indeed – unlike spring wheat, whose high protein level means it is
employed for the most discriminating milling uses.
With the spring wheat premium over Chicago soft red winter
wheat "trading near record level", reaching indeed $2.16 a bushel July basis on
Monday, SocGen forecast "limited upside potential" for the spread.
While keeping a "positive view on wheat prices for the next
12-18 months", the bank said it was closing its "bullish view on the high-protein
wheat over low-protein wheat spread".
'In extreme rationing
The comments came even as SocGen cut its forecast for the US
spring wheat yield to 40 bushels per acre, from 46 bushels per acre, thanks to drought
in the northern Plains spring wheat belt which has left the crop in the by the
far the worst condition for the time of year on official records going back to
That would represent a drop of 7.2 bushels per acre from
last year, and represent the weakest yield but one of the past decade.
The bank forecast US stocks of spring wheat at the close of
2017-18, as compared with consumption – to form the stocks-to-use metric widely
used as a pricing indicating - to fall "substantially" to 23.9% from the 36% at
the end of 2016-17.
Tregg Cronin at Halo Commodity Company flagged that "many
yield estimates are already 40 bushels per acre or below", with the prospect of
high abandonment rates adding to the weakened harvest potential.
The broker forecast the potential for production to fall "below
400m bushels", which would be the lowest since 1988, "and put us in extreme
This year vs 2011
Indeed, other commentators reckoned that this suggested
scope for further gains, with Tobin Gorey at Commonwealth Bank of Australia
noting that the spring wheat premium, while "big" and "highly unusual", has
trod current levels before.
The last time was in 2011 – the only time, indeed, that the spring
wheat yield fell below 40 bushels per acre in the past decade.
"The 2011 premium was only $1.35 a bushel at this time of
year, but it did climb past $3 and ended just over $2.50 a bushel," Mr Gorey
said, using figures for December contracts (a gap currently at $1.78 ½ a
And in fact, this year, the premium could go even higher, Mr
Gorey said, noting that heading into 2017-18, while US spring wheat stocks are
much the same as they were six years ago, those in Canada, a bigger producer of
the grain, are smaller.
Indeed, Canadian inventories are "much lower levels than
they started in 2011 and are also lowish in historical context".
The North American spring wheat "supply situation this
season would tighten a lot more, and more than in 2011, at plausibly lower
"Thus the possibility of Minneapolis premiums exceeding 2011
levels is very real."
Harvest pressure too?
Richard Feltes at RJ O'Brien flagged that the protein spread
could be widened by harvest pressure on winter wheat, as well as by spring
Winter wheat futures "may be pressured as harvest
accelerates while Minneapolis wheat wides its premium over other classes amid
mounting uncertainty over spring wheat supplies and the price necessary to trim
There is "no evidence" that recent Minneapolis prices are "rationing
demand", he said, advising investors "against picking tops" in spring wheat