Can wheat prices trade beyond levels justified by the fundamentals over the next six months? Yes, but that doesn't mean that they will. Expect another unprecedented move of speculative dollars to flow into the commodity markets in the weeks and months ahead. Wheat fundamentals may or may not justify benefiting from that buying power, but wheat should indirectly benefit from strong corn fundamentals.
A rising tide lifts all boats, and that will likely be the principle that keeps the wheat market afloat this year. The 2007 winter wheat crop both here and across the northern Hemisphere is in generally good condition on increased acreage. Adverse weather could still create a short crop this spring, but the odds favor a resurgence in supplies.
World stocks will be tightest as we move through late winter and into early spring, leaving us vulnerable to a surge of panic buying to stretch supplies leading up to the 2007 harvest. Furthermore, strong corn prices would be expected to increase demand for feeding a larger portion of this year's wheat crop, especially overseas. Wheat prices can also expect to receive spillover support from corn and soybeans if prices continue to trend higher through the year, with some of that strength justified to hold onto spring wheat acres over the next couple of months and winter wheat acres as we move into next fall.
Look for wheat to remain a follower unless export demand strengthens significantly into the spring and/or adverse weather threatens this year's crop. Marginal soil moisture should make China's winter wheat crop vulnerable as well, keeping it on the radar of market bulls as we move into the spring. However, wheat does not have a story of its own without a change in the current dynamics.
Fortunately, strong corn fundamentals leave wheat vulnerable to losses in acreage both here and abroad, which is precisely what provided a strong soybean market in recent months despite record stocks. Oilseed traders saw firsthand that bearish near-term fundamentals don't necessarily prevent prices from rising.
The key going forward will be the expansion of wheat production overseas and the interest of the speculative funds in continuing to include wheat in their basket of commodities that they pump money into as we move through the year. The combination of these factors should cause wheat to follow corn this winter, resulting in wide price swings as we move through the spring and summer.
Pricing decisions will remain difficult this year. Hedge-to-arrive contracts will be risky, as they were for soft red winter producers in 2006. Basis will likely be volatile and unpredictable; neither can one expect to pick the high in the market to sell in these conditions. Rather, the focus needs to remain on scaling in sales on rallies at profitable prices that allow your farm business to grow equity. Bring a business approach to your marketing this year, and you'll sleep better for it. Fortunately, healthy feed-grain dynamics should keep profitable pricing opportunities in the wheat market, as well. Best pricing opportunities should be this spring and again in the fall.