Wheat market may take patience Exports, seasonal weakness weigh on prices for now. By Bryce Knorr, Senior Grain Market Analyst

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1 Wheat market may take patience Exports, seasonal weakness weigh on prices for now By Bryce Knorr, Senior Grain Market Analyst The best days of the wheat rally may still be ahead. But first the market may need to get beyond seasonal weakness from the fall harvest, with no assurances the fires of summer can be rekindled. Wheat typically struggles into the corn and soybean harvest. In addition to spillover weakness from those markets, growers cleaning out supplies to make room in storage facilities can also create pressure. Some years good conditions for winter wheat seeding can also be a drag. That looks like a factor this year, at least in the U.S. Rains from Tropical Storm Gordon should add to soil moisture in Kansas, and our Farm Futures survey found growers ready to boost hard red winter wheat seedings by nearly 4%. Plus, the El Nino conditions currently in play are associated with above average yields, for those taking a long view in coming months. A slow start to 2018 crop marketing year exports is also weighing on prices. My estimate of total exports for is 35 million bushels lower than USDA s, and that may be optimistic. Feed usage also looks to be lower given very weak basis for corn. As a result, ending stocks nine months from now could be around 60 million bushels higher than the government s Aug. 10 estimate. The stocks situation may not get any better for the 2019 marketing year either. But that assumes a return to normal yields and an increase in acreage globally. Even with an increase, stocks might not rebound much, which could again make the market sensitive to weather worldwide. That s what gives the market at least some type of hope of a rebound following this bout of weakness. The only strength lately has come from concerns Russia could limit exports. When the ag ministry there said nyet to that idea this week, the market once again retreated. A look at weather around the world shows it may be premature to write off wheat completely. And that s the key for this market, because hopes for higher U.S. prices depend on higher prices overseas. Prices in Russia and France, when valued in rubles and euros, remain near recent highs, including the all-time record set in Russia. Dry weather remains an issue as seeding begins. Some showers are in the forecast but nothing to indicate yet a change in the dry overall pattern. In the southern hemisphere, futures on eastern Australian wheat also rebounded as much of the production area remains in the grip of El Nino drought. And even parts of Argentina, which started the season in good shape, are starting to turn dry. The other factor working in new crop wheat s favor is carry. September-May 2019 HRW worked out to eight cents a bushel per month into delivery, with SRW only a little less. Those May contracts are keeping new crop July inflated. But my rally targets for new crop were met on the August rally, so just getting back to that level on a fall rally would be a selling opportunity. July winter wheat futures in bullish years can mount a winter rally, either on acreage concerns or weather, which would be in sync with the average time between cycle highs. But those cycles can vary widely, which is why rebounds need to be sold, especially to lock up any remaining inventory in on-farm storage.

2 Wheat Supply & Demand Table USDA Bryce Area Planted 46,012 47,300 47,821 48,298 Harvested 37,586 39,600 38,336 40,988 Yield Beginning stocks 1,181 1,100 1,100 1,100 Production 1,741 1,876 1,855 1,974 Imports Supply, total 3,078 3,113 3,087 3,206 Food Seed Feed and residual Domestic, total 1,077 1,152 1,108 1,108 Exports 901 1, ,069 Use, total 1,979 2,177 2,093 2,177 Ending stocks 1, ,029 Average price $4.73 $5.10 $4.78 $5.24 Stocks to use ratio 55.6% 43.0% 47.4% 47.3% Ave. Nearby Futures Chicago $5.06 $5.53 Kansas City Hard Red $5.19 $5.68 Minneapolis $5.63 $6.17 Top Third of Price Range Chicago $5.31 to $5.76 $5.83 to $6.32 Kansas City Hard Red $5.37 to $5.73 $6.10 to $6.51 Minneapolis $5.63 to $6.16 $6.17 to $6.78

3 Beginning Stocks Production Total Supply Domestic use Exports Total Use Ending stocks Soft Red Winter BK White BK Durum BK Hard Red Spring BK Hard Red Winter ,018 1, , , ,000 1, , , ,082 1, , , BK ,

4 80% ODDS 'EL NINO' WILL EMERGE 70% 60% 50% 40% 30% 20% 10% 0% JAS 2018 ASO 2018 SON 2018 OND 2018 NDJ 2018 DJF 2018 JFM 2019 FMA 2019 MAM 2019 Source: NOAA

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7 52 U.S. Winter Wheat Yields /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" 50% Ratings accuracy improves modestly percentage of yield variance captured by weekly winter wheat ratings 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 4/7 4/14 4/21 4/28 5/5 5/12 5/19 5/26 6/2 6/9 6/16 6/23 6/30 Source: Farm Futures

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27 Total Ending Stocks of Major Exporters 120, ,000 80,000 60,000 40,000 20, Includes U.S., Argentina, Australia, Canada, EU and FSU Total Wheat Exports (Year to Date) 60% 50% 40% 30% 20% 10% 0% Total Commitments % of USDA Forecast

28 Accumulated Wheat Export Shipments % 30% 25% 20% 15% 10% 5% 0% Total Shipments % of USDA Forecast Hard Red Winter Wheat Exports (Year to Date) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Total Commitments % of USDA Forecast

29 Soft Red Winter Wheat Exports (Year to Date) 120% 100% 80% 60% 40% 20% 0% Total Commitments % of USDA Forecast Hard Red Spring Wheat Exports (Year to Date) 70% 60% 50% 40% 30% 20% 10% 0% Total Commitments % of USDA Forecast

30 White Wheat Exports (Year to Date) 70% 60% 50% 40% 30% 20% 10% 0% Total Commitments % of USDA Forecast Weekly Wheat Export Inspections 35,000 Thousand bushels 30,000 25,000 20,000 15,000 10,000 5, Yr. Avg. J J A S O N D J F M A M SOURCE: USDA

31 Chicago December Futures /6 3/6 5/6 7/6 9/6 11/6 Bull Non-Bull Dec Dec-17 Chicago December Wheat Futures Seasonal Trend Start Date +1 Week +2 Weeks +3 Weeks +4 Weeks +5 Weeks 9/5 9/12 9/19 9/26 10/3 10/10 Ave. Gain/Loss 1.6 (4.2) (1.7) (1.1) (5.0) % Up 21/44 23/44 22/44 23/44 23/44 % Down 23/44 21/44 22/44 21/44 21/44 Ave. Gain - Up year Ave Loss - Down Year (10.8) (21.8) (20.1) (26.5) (36.8) Biggest Gain Biggest Loss (36.3) (76.8) (120.3) (106.8) (171.5) This table shows the typical seasonal pattern at weekly intervals from the start date, based on average daily futures prices from 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.

32 Kansas City December Futures /1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 Bull Years Non-Bull Years Dec Seasonal Trend for Kansas City December Futures Start +1 Week +2 Weeks +3 Weeks +4 Weeks +5 Weeks +6 Weeks 9/5 9/12 9/19 9/26 10/3 10/10 10/17 Ave. Gain/Loss (3.1) (5.1) (2.2) (4.0) (4.9) (2.9) % Up 18/42 19/42 24/42 24/42 24/42 26/42 % Down 24/42 23/42 18/42 18/42 18/42 16/42 Ave. Gain - Up year Ave Loss - Down Year (14.0) (19.9) (25.5) (35.8) (36.5) (39.3) Biggest Gain Biggest Loss (55.0) (112.0) (136.0) (176.0) (195.5) (206.0) This table shows the typical seasonal pattern at weekly intervals from the start date, based on average daily futures prices from 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.

33 Minneapolis December Futures Feb Mar Apr May Jun Jul Aug Sep Oct Nov December 2018 Bull Years Bear Years

34 Kansas City July Futures /1 10/1 12/1 2/1 4/1 6/1 Bull Year July 2019 Normal Year Chicago July Futures /25 7/25 9/25 11/25 1/25 3/25 5/25 Bull Non-Bull Jul-18

35 Commitment of Traders - Chicago Wheat $7.00 $ $6.00 net position in contracts $5.50 $5.00 $4.50 $4.00 $3.50 nearby futures /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 3/18 5/18 7/18 $3.00 Source: CFTC Index funds Hedge funds Futures Commitment of Traders - K.C. Wheat $ $6.50 net position in contracts $6.00 $5.50 $5.00 $4.50 nearby futures $ /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 4/18 7/18 $3.50 Source: CFTC Index funds Hedge funds Futures

36 Commitment of Traders - Minneapolis Wheat (Futures and Options Combined) $8.00 Contracts /14 7/14 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18 $7.00 $6.00 $5.00 $4.00 $3.00 Large traders Nearby Futures

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