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".
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 1995.
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 rationing mode".
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 bushel).
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 yields.
"Thus the possibility of Minneapolis premiums exceeding 2011 levels is very real."
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 wheat's woes.
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 demand".
There is "no evidence" that recent Minneapolis prices are "rationing demand", he said, advising investors "against picking tops" in spring wheat futures.
By Mike Verdin