By James Barnett
CHICAGO (B)--While U.S. wheat futures have rallied during the past three weeks, at least partially in sympathy with sharp gains in corn and soybean futures, analysts said the larger supply/demand picture remains bearish.
Dry conditions could threaten the U.S. winter wheat crop as it comes out of dormancy in March and April, but weather-inspired wheat rallies are generally dangerous to predict.
"Wheat is still going to struggle price-wise this year, primarily because of the competition we have in the export market," said Doug Hjort, analyst at Hjort Associates in West Des Moines, IA.
Joe Christopher, analyst with Linnco Futures Group in Englewood, CO, said, "The U.S. has become the residual supplier of wheat to the world. U.S. prices are the first to be uncompetitive whenever prices rise."
Roy Huckabay, analyst with The Linn Group, said European exporters are willing sellers of wheat at $5 per tonne below U.S. offers.
Long-term growth in the world demand for wheat also is seen as limited.
Gregg Doud, analyst with World Perspectives in Washington, said, "World consumption has stabilized during the past two to three years, and this begs the question of whether world wheat demand is beginning to flatten out."
Wheat bulls point to dry conditions in the U.S. southern and central Plains as holding the potential for a major weather-inspired rally.
The U.S. hard red winter wheat belt had its driest fall and early winter in several years, and meteorologists have predicted that La Nina conditions could extend this warm, dry pattern.
"There should be continuing excitement this spring surrounding winter wheat crop conditions in Texas and the rest of the southern Plains," Doud said.
However, analysts emphasize that it is too early to pencil in below-trend yields for U.S. winter wheat.
"There is some potential for a weather rally, but it is treacherous to buy wheat futures in January based on what production will be like in June," Christopher noted. "Rains in March and April can take the wind out of the sails of a lot of bulls."
Hjort added, "We've got to get dirt blowing or something else dramatic to suggest there will be a problem before the dry conditions lead to widespread concern."
Analysts said that while the U.S. Department of Agriculture estimated U.S. winter wheat plantings at 42.916 million acres, the lowest level since 1972, this was only a small decrease from 1999 plantings of 43.425 million and could be countered by increased seedings in France and Germany.
"Increased European wheat acreage is likely to counter any reductions in U.S. plantings, particularly as this year's change in EU subsidies makes wheat look like a better d eal for farmers than rapeseed," Christopher said.
Early 2000 U.S. spring wheat plantings estimates have tended to be steady to slightly lower than last year's acreage.
On Jan. 21, closely watched private analyst Sparks Cos. estimated U.S. 2000 other spring wheat acreage at 14.7 million acres, industry sources said. This is a 4.2% reduction compared with 1999 U.S. other spring plantings of 15.348 million acres. Overall, spring wheat acreage reductions should be limited.
"There is not much of an alternative in western areas of the northern Plains, and so any changes should be minor," said Hjort.
Some analysts have speculated that any significant rally inspired by weather problems in the U.S. hard red winter wheat belt could trigger increased spring wheat plantings as farmers look to cash in on a potential shortfall of high-protein wheat.
Analysts said a change in Chinese government policy could support wheat prices during the long run.
"The Chinese government has revised its policy to create a disincentive to produce lower-quality wheat," said Doud. "(Chinese Premier) Zhu Rongji's administration has made a push to increase soybean production while cutting back on wheat and corn. It remains to be seen how long this policy will continue, but it eventually will have a big impact on the grain market." However, any significant reduction in world production could be short-lived as prices begin to rise.
"Wheat is an easy crop to grow, and there are a lot of countries that can grow it," Doud said. "The EU, Russia, China and Argentina could all clog up the market in a short period of time if they decided to make producing wheat a priority."
With a lack of nearby bullish inputs to rally the wheat market, some analysts see the prospect for extended gains in U.S. corn prices as holding the most likely nearby support for wheat.
"My perception is that wheat needs to get fed in both the domestic and the world markets for futures to be able to rally," said Huckabay. "Although some wheat is being fed in the Texas Panhandle, the Southeast and the Pacific Northwest, it is occurring on a very limited basis. Generally, the cash price of wheat needs to get cheaper than corn to enter feed channels, and the price of the two in the Southeast right now are near equal."