Market Insider

Have Wheat’s Highs Come and Gone?

Grain markets continued to see more technical selling as investors continued to exit their long positions, thanks to no major bullish narratives appearing in this past week’s USDA monthly supply and demand report. Most attention in the corn & soybean market is on South American weather, and while there is some moisture that was expected to fall in southern Brazil / northern Argentina, many private analysts are pointing to smaller crops out of the region than what the USDA suggested in last week’s January WASDE. Combined with an unexpected increase in U.S. stocks for the three staples – corn, soybeans, and wheat – we saw more traders take their profits and get out of the market.

Recognizing the impact of hot weather and limited moisture has had on major South American production regions, the USDA lowered estimates for Brazil and Argentina’s soybean and corn crops, but not by as much as some private analysts. Soybean traders took this as bearish, especially since Brazil’s soybean crop – currently estimated by the USDA at 139 MMT – is 1 MMT more than last year’s record, while the country’s corn crop is expected to increase 28 MMT compared to last year’s drought-riddled crop. In Argentina, soybean production was lowered by 3 MMT to 43 MMT, while corn was only lowered by 500,000 MT to 54.5 MMT.

One crop in South America that seems to be getting bigger is Argentina’s wheat (which is nearly done being combined), as the USDA raised their estimate by 500,000 MT to a new record of 20.5 MMT. This beats the 19 MMT harvested in 2018/19 but a local analyst, Buenos Aires Grain Exchange, has the crop even bigger at 21.8 MMT. That said, while the USDA stayed Argentina’s wheat exports at 13.5 MMT, the Argentina government is expected to cap shipments for the 2021/22 crop year at 12.5 MMT so we should expect the USDA to adjust lower.

Elsewhere, Russia’s old crop, 2020/21 wheat exports were raised by 600,000 MT to 39.1 MMT, but their new crop, 2021/22 shipments were lowered by 1 MMT on account of the wheat export taxes and quota (starting Feb 15) the Kremlin are implementing. All this adds up to a larger global carryout of 280 MMT, up 1.8 MMT from the previous estimate and 1.3 MMT more than what the market was starting to see. Other than this handful of subtle changes, there wasn’t much else for the wheat market in this month’s WASDE report. Historically speaking, when there’s a very small change on the balance sheet, we’ve seen much weaker moves, so what’s driving wheat prices lower?

Ultimately, the last 2 weeks of selling in the wheat market are almost wholly attributed to fund selling because of the limited, net-new bullish headlines, and end-users feeling more comfortable about their coverage for the next little while. With the southern hemisphere harvest now known, investors remain wary of the impact on U.S. wheat export demand. In fact, the USDA lowered total U.S. wheat exports by 15M bushels (or ~408,000 MT), all of it attributed to HRW wheat exports. Further, given high prices, U.S. domestic demand was cut by 15M bushels for U.S. HRW wheat, by 1M bushels for SRW wheat (~27,216 MT), and 10M bushels for durum (272,155 MT).

While durum imports were raised by 5M bushels, this meant U.S. 2021/22 ending stocks were raised by the same amount to now sit at 22M bushels (or about 600,000 MT), which would be the lowest since 2013/14. Conversely, on account of 5M fewer bushels being imported, the American HRS wheat carryout was lowered by 4M bushels to 128M bushels (~3.48 MMT), the smallest since 2007/2008’s record-tight 68M bushel carryout.

The decision by funds to liquidate their longs might’ve been mostly because of the increase in U.S. total wheat stocks for the 2021/22 crop year to 628M bushels (or 17.1 MMT), up 30M bushels on the month and 20M bushels more than what the market was expecting to see. This includes 92M bushels of SRW wheat (2nd-lowest in 14 years), 340M bushels of HRW wheat (smallest in 7 years), and 46M bushels of white wheat (lowest in 14 years). Given the relatively tight carry out, there’s going to be increasingly more weight put on the importance of the 2022 harvest. Therein, the SRW wheat regions look to be in decent shape, but drier conditions in the HRW-heavy producing region of the U.S. Southern Plains (KS, OK, & TX) remain. From a timing perspective, we’re about 6 – 8 weeks away from the U.S. winter wheat crop coming out of dormancy.

Despite the USDA pegging U.S. winter wheat acres at a six-year high of 34.4M (up 2.2% year-over-year), this is only 100,000 acres more than the previous estimate, and given the drought conditions, below-average yields would certainly nullify the expanded area. While what happens in South American can push the entire grain complex one way or the other, if the Southern Plains drought persists for the next few weeks, I’m expecting more bulls to come back into the market. Similarly, HRS wheat futures could push higher without a couple more major snow/moisture events in the U.S Northern Plains (MT and ND) and Western Canada before the start of the Plant 2022 campaign,

All things being equal, despite the pullback we’ve seen in the market over the past month, the sell-off is more noticeable in spot markets, whereas new crop 2022 prices continue to provide good opportunities. Sure, values aren’t as great as it was a few weeks ago, but compared to where we were a year ago (let alone, almost any other year) locking in some profits and harvest delivery isn’t a bad idea. Hedging this forward contract would allow to you capture any upside in the futures market, should another rally materialize because of the potential ongoing drought. And if you’re not into the hedging thing, then locking in a basis and waiting to price out the futures over the next 7 months is another option.

To growth,

Brennan Turner

Founder | Combyne Ag