Market Insider

Feeling Bullish About Wheat Prices Again?

Grain markets pushed through into the second half of April with some weather and geopolitical premiums being added back into values for corn and wheat, while demand concerns from this month’s WASDE pressured oilseeds. In that report, the USDA showed their worry for Chinese soybean demand, despite imports hitting a record in the first quarter of 2023, albeit those are mostly coming from Brazil. Old crop corn futures hit their highest level in nearly 2 months, thanks to more Chinese purchases and a wet, then frosty, Midwest forecast that could slow down the start of Plant 2023. Meanwhile, the U.S. winter wheat crop got its second-worst rating on record for the 2nd week of April, with 37% rated poor-to-very poor (P/VP) and just 27% rated good-to-excellent (G/E), matching the low mark of last year when U.S. wheat futures hit its season highs. The worst conditions continue to be in the U.S. Southern Plains, which is why Kansas City HRW wheat futures were the new crop performance winner.

Double-digit gains on Friday were the big reason that the wheat complex as able to get into the green, as end-of-week weather forecasts trumped any bearishness from the April WASDE on Wednesday. Despite some warmer weather for the region, North Dakota and Minnesota still have snow on the ground, and/or frost hasn’t left it, which is concerning traders as to when Plant 2023 will start. This means that traders are going to have to pencil in as much as a 1 – 2 million acre swing out of corn, soybeans, or spring wheat for the region. Some are holding onto the belief that a repeat of Plant 2022 is possible, whereby a late start was offset by huge crop prices, which incentivized farmers in the Northern Plains to plant late and hope Mother Nature would help (which they got!).

With crops still very expensive to seed this spring, and corn and wheat futures nearly 25% lower than they were a year ago, and 13% lower for soybeans, farmers may opt instead to take advantage of the new prevent plant rules that allow them to graze it. Effectively, instead of making a late-season planting gamble, farmers in the Northern Plains could instead double-dip with a government cheque AND renting it out for pasture.

Speaking of cattle pasture, the state of some U.S. winter wheat fields this year may not even meet grazing potential, with many fields across the Southern Plains already getting zeroed out, as moisture now would be too late anyways to harvest something. High temperatures and strong winds last week continue to stress the crop, but wheat futures were boosted on Friday by World Weather Inc.’s Friday forecast that below-freezing temperatures could hit the U.S. Plains and Midwest this coming weekend. This would impact the HRW wheat crop in the Southern Plains most, given the string of warmer weather lately that’s jumpstarted its growth again after winter dormancy. Therein, I point you to the below charge of Kansas’ winter wheat G/E rating of just 13% this past week, down 21 points year-over-year and 33 points below the three-year average. It’s also nearly just half of last year’s low-water mark for the state, so I would expect more bullishness the longer this number stays low.

Factoring in this week’s WASDE report, there’ll be more U.S. wheat carried over into the coming 2023/24 crop year, as the USDA raised old crop stocks by ~30M bushels (or ~810,000 MT), due to weaker feed used and bigger imports. More specifically, U.S. hard red spring wheat ending stocks spiked by 31M bushels (or ~843,700 MT), thanks to lower exports and domestic use. The only other major changes was U.S. durum imports being increased by 4M bushels (~108,900 MT) while SRW wheat exports were raised by 15M bushels (~408,200 MT). Thus, with higher protein likely expected from the American HRW wheat crop this year, this will likely weaken any price advantage for HRS wheat this summer, in terms of demand for paper blending.

On the international wheat balance sheet, Canada and Australia didn’t see any changes from the March WASDE, whereas Argentine and EU wheat exports were lowered by 1 MMT and 2 MMT, respectively. The latter is an interesting update as many bullish analysts were expecting Europe’s tighter wheat balance sheet to be a catalyst for higher prices this spring, but I think it’s less of a variable now. On the flipside, Russian and Ukrainian wheat exports were both raised, but the biggest surprise in the wheat market was for China, as the USDA raised their imports by 2 MMT to 12 MMT, which would their largest wheat import program since 1995/96’s 12.5 MMT and, therein, surpassing Egypt as the world’s largest wheat importer in 2022/23. So far, Australia and Canada have been some of their biggest trading partners, with nearly 5 MMT being purchased from Australia so far, and 2.15 MMT from Canada, or about 4x what was purchased through the same period last crop year.

Rounding out the biggest wheat price-moving variables I’m watching, the Kremlin started to talk tough again this week about not extending the Black Sea Grain Corridor Deal again in a month’s time if economic sanctions aren’t lifted. Despite the fact that Russia is expected to see a record amount of grain exports this year (helped by a record wheat shipment campaign), most believe that the Russian economy is starting to feel the impact of said sanctions. At the heart of the issue is a separate (but connected) 3-year agreement that the United Nations signed with Russia last summer to help the country with its agricultural exports, including fertilizer but nothing’s really changed (and yet, Russian exports continue to flow!). Should Russia choose to pull out of the Grain Deal, we’d likely see shipping volumes slow down, due to higher insurance rates and just the hard fact that there’s no guarantee a ship will make it to its destination. Accordingly, the 7.5 MMT of Ukrainian wheat and 13.9 MMT of corn that’s been shipped out safely since the original deal was signed last July would weaken, and therefore, spike prices.

Therein, it looks like the market is baking in a sizeable weather premium to current corn and soybean new crop futures, suggesting that the reconciliation between them and new crop futures will be more pronounced this summer, but to the downside. For now though, most analysts agree that the lows for corn and wheat are in as the market is pricing in the potential for a record 15 billion bushel corn crop, while also being aware that a broader global economic recession could weigh heavy on prices a few months from now. For spring wheat, the profitability potential isn’t as great as last year, but that could certainly change in the coming weeks if any of the above bullish variables play out to their maximum. A few major bullish variables certainly remain in play and so we’ll need to continue to pay close attention to the state of the U.S. winter wheat crop, planting delays in the Northern Plains, and the Black Sea Grain deal being renewed (or not) a month from now.

To growth,

Brennan Turner

Independent Grain Market Analyst