(DTN) - The old market saying "plant in the dust and the bins will bust" could be tested in 2011 if what I saw of the Kansas wheat crop over the Thanksgiving holiday doesn't change.

Much has been made of the poor condition of the winter wheat crop as it headed into dormancy in the late fall, particularly with the wide variety of weather calamities that squeezed global wheat production in 2010, the latest being heavy rains trimming the Australian crop. That's 2010 in a nutshell: an area of the world that is usually the poster child for "arid" -- Australia -- seeing its crop damaged by too much rain.

Notice that the graphic attached to this piece incorporates the DTN Winter Wheat Crop Condition Index with a picture of a wheat field taken on my Thanksgiving trip back to south-central Kansas. The DTN Crop Condition Index is derived from USDA National Agricultural Statistics Service's weekly numbers by multiplying the excellent percent by 3, good by 2, fair by 1, poor by minus 1, very poor by minus 2, and then finding the sum of those numbers. The index is not a percent but a point scale and therefore can equal more than 100.



Now, before I go much further, let me make three important points:

1) Weekly crop condition reports and the numbers they contain are irrelevant. Given my druthers, I'd not talk about them at all.

2) In winter wheat, there is little to no correlation between fall condition numbers and final yield the following summer.

3) Using crop condition numbers as a key tool in a marketing strategy is like using a metal flagpole as a shelter in a lightning storm.

Having established the groundwork for this discussion, I will say that the conditions I saw over the Thanksgiving holiday were bleak, with my brother informing me that the last meaningful rain had occurred in the late-August-to-early-September timeframe. Many of the fields I saw looked worse than the one pictured in the graphic, with some showing emergence of only about 25 percent to 33 percent.

Given the scenario in wheat, is it time to go all in? Bet the proverbial farm that 2011 prices will rush past 2010 levels as the world once again scrambles to find supplies of the staff of life? Factoring in the possibility that parts of the Southern Plains could see some acreage losses due to low emergence, particularly if soybean and corn prices decide to roar higher this winter and next spring, the likelihood of yet another drawdown in domestic stocks and ending stocks to use sparking a rally in winter wheat futures strengthens.

The question remains, though, is the winter wheat crop really that bad? Take another look at the Crop Condition Index chart -- for a good chuckle if nothing else -- and you'll see the 2011 crop (red line) compared to the five-year average (blue line: yes I know, I placed it on a blue-sky background making in it harder to read) and the 2004-2005 crop. Yes, this year's crop trails the average by 25 points, but is surprisingly similar to the conditions seen in 2004-2005.

As Shakespeare would say, "aye, there's the rub" for over-exuberant wheat market bulls. The market has seen this situation before: The domestic wheat crop seems to be in trouble following a year when global ending stocks to use posted a sharp decline. However, by the time 2004-2005 was said and done, the domestic wheat crop (including spring wheat, but dominated by winter wheat production) posted the second-highest yield on record at that time of 43.2 bushels per acre (HRW averaged 36.8 bpa, SRW averaged 54.2 bpa). Those that bought into the Kansas City wheat market in late 2004 through early 2005 (roughly $4.20) and held through harvest expecting a rally to 2002 highs near $5.00 lived through the "bulls become steers" scenario as the market fell to about $3.20 by the summer of 2005.

But, and this is a big "but," we are dealing with different market dynamics than we were in 2005. Back then, we were just on the cusp of the revolution that would see noncommercial (investment, speculative) traders wrest control from large commercial traders in commodities, turning them from the designed risk transfer tools to long-term investment instruments (no, I'm not kidding). Take these numbers for example: Total open interest in Chicago at the end of May 2005 was about 195,000 contracts, while total open interest in Kansas City was about 60,000 contracts. At the end of November 2010, total open interest in Chicago stood at about 529,000 contracts and 240,000 contracts in Kansas City.

In other words, if the investment community views the wheat fundamental situation as a problem, it is now big enough and strong enough to move the market against what the commercial view of supply and demand might be. The rally in 2010 is a classic example, meaning a similar move in 2011 can't completely be discounted even once more is known about the possible supply and demand situation. It is also this noncommercial domination of the markets that has led to the non-convergence issues in wheat, issues that won't be going away anytime soon, but that is a subject for another day.

Darin Newsom can be reached at darin.newsom@telventdtn.com.