Wheat, oat futures soar as commercial buyers scramble amid supply worries

Key Points
  • Drought in Dakotas and Montana is seen intensifying; there are also unfavorable crop conditions and growing wildfire concerns.
  • Analysts say short-covering by funds in wheat also is supporting prices.
  • Minneapolis-traded spring wheat futures rose nearly 6 percent while Chicago oat futures were up as much as 8 percent during the session.
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Wheat futures soared Monday as a worsening drought in the northern U.S. Plains and tougher crop conditions in Canada renewed supply concerns.

Besides the drought, analysts say managed money short-covering in wheat along with commercial buying are helping to propel the market higher.

"We have continued hot and dry conditions for spring wheat, particularly Montana and North and South Dakota — and the weather pattern is not changing," said Brian Hoops, president and senior market analyst at Midwest Market Solutions, a commodity trading and marketing firm based in Springfield, Missouri.

Added Hoops, "In fact, it's intensifying as far as drought-like conditions. So the crop is being perceived as smaller and smaller."

Spring hard red wheat futures in the September contract last traded at $8.16 per bushel Monday on the Minneapolis Grain Exchange, a four-year high and up nearly 6 percent from Friday. It soared almost 16 percent last week and Monday represented its ninth straight session of gains.

Spring wheat grown in the Dakotas and Montana is a high-protein variety considered a premium quality by bakers and millers over the Chicago-traded soft white winter wheat. The high-protein grain is used in artisan foods such as hearth breads, rolls, bagels and pizza crust.

The Chicago-traded September winter wheat, a more actively traded contract, jumped more than 5 percent Monday and settled at $5.55 a bushel, its highest level in about two years. It had been as high as $5.56 a bushel, or levels it has not seen since 2015.

The outlook for meaningful precipitation in the drought areas of the Dakotas and Montana is grim, and there are also concerns about unfavorable conditions for growing across the border in Canadian wheat provinces such as Alberta and Saskatchewan. The drought also is believed to have contributed to several lightning-related fires in the past month.

Last month, North Dakota's governor declared a drought emergency and the state's forestry agency warned that the extended dry conditions are making wildfire risk worse.

"You're going to have multiple days of 90- to 100-degree temperatures with no [precipitation] on an already really, really stressed crop," said Joe Lardy, research manager at CHS Hedging, a commodities broker in St. Paul, Minnesota. "And there's just not any good substitution for spring wheat, either."

The spring wheat crop, which was planted in April and May in the U.S., is particularly vulnerable in June and July during its pollination stage.

Analysts say there have been more hedge funds and speculative money pouring into the wheat markets in Chicago and Minneapolis. Also, there have been cases of commercial users buying out of fear that prices will go even higher.

"Every day these prices go up we're seeing end users scrambling to buy, which is adding to the supportive undertone in the futures market," said Terry Reilly, senior agriculture futures analyst at Futures International in Chicago.

As for the outlook on spring wheat, Reilly said it could reach "maybe even the $10 [a bushel] area if the weather doesn't improve. It's not just U.S. and Canada weather." Reilly explained that there have been downgrades to the Australian wheat crop and to the European crop. For example, he said Ukraine's wheat crop is having weather problems and parts of Russia are seeing similar challenges.

Analysts point out global supplies of wheat are ample, but the high-protein wheat grown in the U.S. northern Plains and Canadian prairie provinces is the big question mark.

"The cash market continues to whip higher for high-protein wheat," Reilly said. "So it tells us that the global supplies of high-protein wheat might be a lot shorter than what the trade was looking at maybe a couple of months ago."

The oats market, which is thinly traded, also has been rallying on the coattails of wheat. Reilly said there has been end-user buying in the oats market, too.

Chicago-traded oats futures for December delivery rose as much as 8 percent during Monday's session but settled up about 4 percent.

"Oats has basically the same growing patterns, same fundamentals as spring wheat," said Hoops. "It's a bullish commodity."

Oats futures have jumped more than 30 percent in the past two months, while wheat during the same time is up just under 20 percent.