On Saturday, we discussed what may be the "last remaining cheap asset", namely wheat, which contributor Kevin Muir pointed out had been stuck in a vicious bear market for years, and added that over the past few years, "the weather has been as close to perfect growing conditions as a farmer could ask. All of the droughts have been on the West side of the Rockies, with the grain growing conditions on the other side experiencing ideal weather." He asked rhetorically, "how long this can continue. This winter the West Coast experienced a record amount of precipitation, will the opposite now happen in the plains?"
Incidentally, one may not even need adverse weather conditions to spark a buying frenzy. As Muir also noted, a catalyst for a spike may be purely technical: "this terrible bear market has not gone unnoticed by the speculators. Have a look at the net speculator position in the CBOT wheat contract. Specs have never been this short! Everyone believes prices can only go one way - lower! After all, we are all top performing bbq’ers and lovers."
Muir, adding he is long grains, concluded that "few are talking about the real reason that grains offer a compelling risk reward from the long side. If this Central Bank experiment goes off the rails, we could have a return of 1970’s style inflation. That happens to coincide with the last great bull market in grains. When you are busy dismissing the possibility of a 1970’s style bull market in grains, don’t forget - we all want to be contrarians, but it sure is hard. Don’t look now, but I think your steak is burning."
And while his secular thesis has yet to pan out, an unexpected "perfect storm" so to speak took place just 24 hours later, when wheat prices posted record gains in Chicago on Monday as the U.S. winter crop faced substantial losses from a freak winter storm that brought in snow and high winds that slammed into four Midwest states including Kansas, the top grower.
Satellite imagery of the storm forming over the midwest from April 28 to May 1, 2017
As David Streit, the senior lead forecaster at Bethesda, Maryland-based Commodity Weather Group LLC, said in a telephone interview cited by Bloomberg, more than 12 inches of snow fell on ripening wheat in parts of Kansas, Colorado, Oklahoma and Nebraska in the past 24 hours. And while it will take several days before the damage can be assessed accurately as the snow melts, early estimates suggest losses could exceed 50 million bushels, according to Pira Energy.
Couple this with the record net spec short in wheat and the result was today's record surge in July futures for soft red winter wheat, which is used to make cookies and cake, and which jumped 5.5% to $4.56 while corn prices climbed 3 percent in active trading.
“The depth and weight of yesterday’s snow has certainly caused irreversible damage to some of the Kansas crop, given the advanced stage of development,” Peter Meyer, a senior director at Pira Energy in New York, said in a telephone interview. “We probably lost 50 million bushels in the area, and it may reach 100 million bushels depending on the weather the next month.”
The early indications were not good: Bloomberg adds that there were "many reports of snapped wheat stems, and for a crop in the early stage of forming grain, that suggests there could be “substantial” production losses, INTL FCStone chief commodity economist Arlan Suderman said in a note. Heavy rain also fell over the southern portion of the Midwest over the weekend, and floodwaters need to recede this week to assess how much of the crop needs to be replanted, he said."
Making matters worse, about 25 percent of the Kansas crop was forming grain as of April 23, up from 20 percent a year earlier and above the 17 percent average in the previous five years, U.S. Department of Agriculture data showed. About 23 percent of this year’s winter-wheat acreage was planted in Kansas in the autumn, making an accurate assessment of losses days - or weeks - away, Meyer at Pira Energy said. The warm weather in February and March pushed the crop further along, leaving it vulnerable to damage from the heavy snow.
“It was a pretty nasty storm,” Streit of Commodity Weather Group said. “It is probably the most snow I can remember for the region” for this time of year, he said.
Further anecdotal estimates suggest that today's price spike may indeed be just the beginning:
In 2016, Kansas, Colorado, Oklahoma and Nebraska combined to produce almost half of the U.S. winter wheat crop. Right now, the snow has crushed many plants in the western third of Kansas, Aaron Harries, a vice president of research at Kansas Wheat in Manhattan, said in a telephone interview. The crop in the Plains, where hard red winter wheat is primarily grown, has been more advanced than normal following a mild winter.
“The wheat was a little bit taller than it might normally be,” Harries said. “In a lot of places, the stems actually snapped or kinked over. If that’s the case, it can’t get nutrients to the head anymore, and it’s done.”
The snowstorm followed a freeze late last week that also threatened the state’s crop. According to a map from Kansas State University Extension, wheat in more than 20 counties throughout central Kansas was at “high risk” of freeze injury on April 27.
It has yet to be seen if this weekend's freak winter storm is the catalyst that unleashes Muir's long-running bet on a surge in wheat prices, a move which would have a dramatic impact on the Fed's stated intentions to tighten monetary conditions as a surge in food prices would lead to a lot of unhappy Americans. However, as of Monday's close, it is reasonable to say that what until just 48 hours ago may have been the "last remaining cheap asset" just got substantially more expensive.