Grain markets got a bullish lift last week with Friday’s WASDE report from the USDA showing smaller inventories than what the market was expecting, along with sustained strong demand. Wheat’s gains were supported by confirmation of said demand but were kept in check by larger harvests from the world’s major players, namely Russia, Australia, and Canada. While speculative dollars seem content sitting on the sidelines – managed money’s position in the three North American wheat futures markets are all at multi-year lows – in my opinion, today there are more bullish variables than bearish ones, which suggests wheat prices will trend higher through the rest of the calendar year.

Before digging into why wheat prices are primed to go higher, corn futures ended the week on their highs, as global 2022/23 ending stocks came in at 306.7 MMT in the August WASDE, more than three MMT below the trade’s expectation and a 6.3 MMT drop from the July print. While the USDA suggested an average U.S. corn yield of 175.4 bu/ac, the crop remains an estimated 5 – 10 days behind normal development, and 16% of the crop is currently rated in poor-to-very-poor condition, up from 11% at the same time a year ago.

For soybeans, August weather remains uber important, and with the recent heat but limited moisture, I’m starting to hear more consensus that we’re not going to add many more bushels than what’s already been priced in. One scenario to consider is if average U.S. soybean yields even drop by 0.5 bushels per acre from the current 51.4 estimates (which matches the current record), then that would drop carry out below the 200M bushel level (the USDA suggested an already-tight 245M bushel carryout for 2022/23 in Friday’s WASDE). We’ll surely hear more about both corn and bean yield potential in next week’s annual ProFarmer Crop Tour, which starts Monday, August 22, and will run through Thursday, August 25, going through Ohio, Indiana, Illinois, Iowa, Nebraska, South Dakota, and Minnesota.

On the U.S. wheat balance sheet, old crop inventories came in at 610M bushels (16.6 MMT), about 40M bushels below the average pre-report guesstimate. While 2022 harvested acres were increased, U.S. HRW winter wheat production was lowered by 9M bushels (or 245,000 MMT), and durum output was felled by 3M bushels (or 81,650 MT); the flipside is 6M more bushels (or 163,300 MMT) of HRS wheat are expected to get combined. On the 2022/23 demand side, the USDA raised exports by a net 25M bushels (680,400 MT), as with prices for all wheat classes dropping by about 30% since their mid-May highs, they’ve become a bit more competitive on the global stage.

This increase in U.S. wheat exports included a 3M bushel reduction in US durum exports, which is significant, considering the EU’s durum crop estimated at just 7 MMT, a 9% drop year-over-year, and the smallest durum crop for the continent in 25 years. This includes a 10% decline in Italy’s durum harvest to just 3.5 MMT, which suggests the pasta powerhouse nation will need to import about 2.6 MMT to meet demand. That said, a just-as-stronger import need is likely to come from North Africa, after the region suffered from low rainfall this growing season. Case in point, Morocco’s total cereal harvest is expected to be just one-third of what it was last year, including a durum harvest of just 810,000 MT. Despite these bullish realities, new crop Canadian durum prices haven’t reacted all that much (yet).

Staying in Europe, without Ukraine shipping any wheat after the Russian invasion, I’ve been expecting to see the USDA raise EU old crop exports and they finally did, jacking them up by 2.25 MMT. This pushed ending stocks lower by 1.4 MMT to 13.1 MMT, and combined with the Harvest 2022 reduction of 2 MMT to now sit at 132.1 MMT, there are certainly smaller available supplies in 2022/23 crop year (the USDA also reduced EU corn product by 8 MMT due to the hot/dry summer they’ve had). However, the USDA is optimistic that Ukraine’s exports will start to pick back up, so they raised shipments by 1 MMT to 11 MMT, while dropping the EU’s exports by 2 MMT to 33.5 MMT.

It's worth noting here that the first boat of Ukrainian wheat made its way to Turkey this past weekend, but it was just 3,050 MT, so a drop in the bucket of what, on an average load, sails out of the Black Sea. While 18 ships of Ukrainian grain have now made their way through the “grain corridor”, the USDA is anticipating a bigger export campaign from Russia in 2022/23, raising shipments by 2 MMT to 42 MMT. This is a function of the USDA finally increasing their estimate of the Russian wheat harvest (by 6.5 MMT to 88 MMT), but it’s still below private estimates sitting in the 90 – 94 MMT range. It’s worth mentioning that there are some rumours of poor quality from some parts of Russia, but will it matter that much to markets when their crop is this big?

Arguably yes, it does matter as the available supply of good quality milling wheat remains quite tight, and demand is looking to be consistent. Conversely, the USDA increased China’s domestic demand by 4.4 MMT. While production was also raised to a record of 138 MMT, heavy rains this growing season have negatively impacted the quality, namely higher toxins and lower protein. There’s a good likelihood that Russia will provide China with some good milling wheat quality to fulfill their new grain trading partnership. Still, it’s more likely that China will look to the U.S., Australia, and Canada for additional high-protein supplies.

And it appears the latter two players will have a healthy amount of wheat to go around: in Friday’s WASDE, the USDA raised Australia’s Harvest 2022 by 3 MMT to 33 MMT. While that’s technically a drop year-over-year, it’s still a huge crop and the third consecutive year of Aussie producers taking off more than 30 MMT from their paddocks. Therein, the UDSA raised Aussie wheat exports to 25 MMT, but that’s still 1 MMT below Canada’s forecasted wheat shipments of 26 MMT. This is up 1 MMT from last month’s estimate and a function of the USDA increasing the Canadian wheat harvest estimate to 35 MMT. Compare this to Agriculture Canada’s current production estimate of 33.7 MMT of all wheat (including durum), and exports of 22.4 MMT. In my opinion, the USDA vs AAFC difference of 1.3 MMT will likely settle on the lower end of things.

Thinking bigger though, the USDA pegged the 2022/23 crop year to end with 267 MMT of wheat, a 14-year low, and the fourth straight year of declines. Buoyed by the reality that the world is clearly consuming more wheat than it produces, hedge fund managers and global traders should eventually worry about Ukrainian farmers’ seeding capabilities this fall, as they remain challenged by many factors. With limited financing options, it’s been suggested that most Ukrainian farmers won’t make a profit planting wheat or barley. While it’s possible the World Bank or another similar entity steps into providing stable liquidity, I don’t hear any of this talk happening! Therein, even though they remain above their seasonal averages, the milling wheat market continues to look underpriced.

To growth,

Brennan Turner

Founder | Combyne Ag