Societe Generale forecast further gains in wheat prices, cautioning that the worst start for the US autumn-sown crop on record likely implied a depressed yields at next year's harvest, adding to world pressures on supplies.
The bank, which has been one of the more negative forecasters for agricultural commodity futures, said that wheat prices nonetheless were "finding support" from the "supply concerns which now include US winter wheat".
The comments follow a US Department of Agriculture assessment that only 40% of winter wheat seedlings were in "good" or "excellent" condition as of Sunday, the lowest reading since records began in 1985.
Seedlings had been stressed by high winds, besides persistent drought in hard red winter wheat areas including Kansas, the top wheat-growing state.
While some commentators have been cautious to reflect this in prices so early in the season, with crops last season recovering well from a weak start, that recovery reflected the exception rather than the rule, SocGen said.
'Little hope for a significant improvement'
Comparing initial crop ratings with eventual harvest suggested that there was indeed a correlation between early progress and the final yield.
"Years in which conditions deteriorate from initial to final assessments tend to fall short of trend-line yields and those years that see improvement tend to outperform the trend," SocGen analyst Christopher Narayanan said.
Furthermore, hopes of a rebound this time may be reduced by the wide extent of drought conditions compared with the Texas-focused dryness last season.
"Drought is more widespread this year, potentially reducing the chances of recovery after the crop breaks dormancy," Mr Narayanan said
"This, in effect, could offer little hope for a significant improvement in crop conditions."
He also flagged the support to US markets from the growing competitiveness of US supplies compared with those from the former Soviet Union and Europe, as highlighted by results of an Egyptian tender earlier this week.
"We continue to see upside to wheat prices," he said.
The comments also come amid reduced hopes for the Argentine and Australian wheat crops currently being harvested.
The USDA's Buenos Aires bureau in a report overnight cut its forecast for the Argentine crop to 10.8m tonnes, compared with an official department estimate of 11.5m tonnes, if remaining above forecasts from Buenos Aires and Rosario grains exchanges of 10m tonnes or so.
Help or hindrance?
In Australia, early harvest talk is of protein levels, as well as yields, falling below initial expectations after a dry end to the growing season – although it is unclear yet whether a fresh bout of rains has come in time to revive crops, or will merely upset harvesting.
"Heavy rains fell throughout much of the Western Australia wheat belt over the past 48 hours," Luke Mathews at Commonwealth Bank of Australia said, noting reports that some areas received two months' rain in one day.
"The rainfall will come too late to boost yields for most [Western Australia] crops, perhaps with the exception of those in the Albany port zone."
However, "heavy rainfall is expected to extend to the eastern states next week".