Market Insider

Wheat Bulls, Weather Firmly in Driver’s Seat

Grain markets climbed higher in the second week of May as Plant 2022 delays and a bullish WASDE report from the USDA helped push both old and new crop values higher. While wheat was the crop most supported by this month’s WASDE – which included the first official 2022/23 supply & demand estimates from the USDA – a record U.S. soybean crop is forecasted, on the foundation of record acres. Despite this, ongoing drought concerns in South America and reduced palm oil exports from Southeast Asia will keep the vegetable oil complex in a tight carryout situation. While old crop corn futures pulled back a little bit, new crop corn values surged higher last week on Plant 2022 weather concerns. 

In this past week’s May WASDE, the USDA estimated that U.S. corn production will fall 4% year-over-year, thanks to them dropping average yields by four bushels per acre from their February Outlook to 177 bu/ac. However, this American corn production number could pull back even more as, thanks to the cold, wet spring so far in the Dakotas and Minnesota (the Northern Plains), as many as 3M acres of corn and spring wheat could get planted instead with soybeans. Accordingly, there’s a lot of attention on the weekly USDA crop progress reports, which, last Monday, showed just 22% of the U.S. corn crop planted.

By the middle of May, the benchmark the market tends to look for is 50% - have American farmers planted at least one-third of their corn crop in the last week? My gut says no, given some of the weather this past week, including a derecho wind storm hitting the Northern Plains. Years of comparable slow starts include 1993, 1995, 2013, and 2019, and excluding the disaster year 1993, corn yields in the other three years dropped by an average of nearly 6% from the trend. Applying that average to this year would suggest about 1 billion bushels less than the 14.46B bushels the USDA is forecasting for Harvest 2022.

While corn is getting its usual spotlight for this time of year, the wheat complex continues to have the most bullish underlying fundamental. Looking first at the 2021/22 old crop balance sheet in the May WASDE, Argentina’s harvest was raised by an incredible 1.15 MMT to now sit at 22.15 MMT. Accordingly, with this increase in output and Ukraine’s shipments in limbo, Argentina’s 2021/22 wheat exports were raised by 1 MMT to 15.5 MMT.

In Europe, 2021/22 wheat exports were lowered by a significant 3 MMT, as the bloc members ignore the temptation to sell into the international market, and instead maintain supplies for their domestic needs (+750,000 MT in their domestic demand). Therein, the EU’s carryover stocks going into the 2022/23 crop year were raised by 2.25 MMT. Also of note was Australia’s old-crop carryover climbing by 500,000 MT while U.S. stocks were lowered by 650,000 on account of higher exports (which is a bit perplexing, given the slow pace of their shipments). Canada, Russia, and Ukraine’s old crop wheat balance sheets were unchanged.

Turning to 2022/23 new crop, Russian farmers are expected to harvest their 3rd-largest wheat crop ever at 80 MMT, thanks to favourable moisture received throughout April as the crop exited winter dormancy. Therein, Russia will be the largest wheat exporter again in 2022/23, whereas next door in Ukraine, only 10 MMT is expected to get shipped out, a drop of nearly 50% year-over-year. This is due to a harvest that’s expected to be 35% smaller year-over-year at just 21.5 MMT, largely attributed to average yields falling by almost 20% and consensus that 30% of Ukraine’s wheat acres are in conflict areas and won’t be harvested due to a lack of fuel and farm labour, hidden mines, and fields negatively impacted by the ongoing military operations.

In the U.S., the USDA is finally starting to drop its expectations for the American winter wheat crop because of the drought in the Southern Plains. The USDA told the market this week that abandonment of wheat fields is relatively high, and Kansas, the #1 winter wheat-producing state, would produce just 75% of what it did in Harvest 2021. Total American winter wheat production is forecasted at 1.17B bushels, down 8% year-over-year. Still, the bigger story is in the hard red winter wheat class, whose harvest is estimated to total just 590M bushels, a 21% decline.

However, the USDA seems to be banking on higher spring wheat yields, as total American wheat production is pegged at 1.73B bushels, up slightly year-over-year. Many other analysts and I have a tough time buying into this forecast though, given the aforementioned delayed issues in U.S. spring wheat acres. What does make more sense from the USDA though, is their estimate that U.S. wheat exports would come in at 775M bushels, the smallest since the 1971/72 crop year. While wheat-by-class demand projections for 2022/23 won’t be published until the July WASDE, we did see the USDA raise old crop exports of HRW and HRS wheat (hence the drawdown in old crop U.S. wheat stocks mentioned above).

Finally, adding fuel to the bullish fire for wheat was the Indian government, which reversed its previous position and said this past weekend that it would start banning wheat exports. Complicating the situation was that they announced one day later that they would still look to export wheat to countries experiencing food deficits, such as Egypt. The government of India is intervening in order “to meet their food security needs” and because unregulated, private exports had led to a local rise in prices (but this shouldn’t be a shock when the private market price is 20% better than what the government is paying). There was speculation in the market that India would be able to ship 10 MMT of wheat for the 2021/22 crop year, but the USDA has only estimated their shipments at 8.15 MMT, actually a drop of 350,000 MT month-over-month. The same amount raised India’s wheat ending stocks to 21.35 MMT.

All things being equal until we know more about the production situation in the northern hemisphere, the wheat bulls continue to be in the driver’s seat. I continue to watch the three main variables: the Ukraine/Russia export issues, drought in North America, and more countries implementing protectionist policies and removing themselves from global trade flows. No matter how these government and geopolitical activities affect prices, Mother Nature always has the final say. With the upcoming forecast, we’ll likely see more weather premium added to grain futures over the next two, maybe three weeks. Thus, my prediction in this column back in the beginning of March that Kansas City wheat futures could top $14 USD/bushel is looking more likely, than not likely.

To growth,

Brennan Turner

Founder | Combyne Ag