July 2022 WASDE: Safety on the Sidelines?
Grain markets pulled back again to move into the second half of July in a downtrend with more fund selling happening after this past week’s relatively neutral WASDE report from the USDA. Rain in major North American growing regions also added some bearish pressure. As grain markets have pulled back significantly in June and so far, July, from their highs in mid-May, there’s just not enough new bullish news to keep money managers in the game, and that’s why the selling has continued. This isn’t just the case for grain futures though, as fund liquidation is happening across the entire commodity complex – from oil to cotton, more speculators are increasingly concerned with possible demand destruction because of a coming recession (AKA consumption is expected to pull back).
Many analysts agree that the fundamentals – namely tight supplies and ongoing trade issues out of the Black Sea – are bullish, but nobody wants to take the bait in the middle of the summer when Harvest 2022’s potential is looking fairly strong. That said, even though more money managers are sitting on the sidelines of grain markets these days, they’re fully aware of the heat forecasted for the Midwest and surrounding areas this coming week, which will include triple-digit temperatures. Put simply though, the macroeconomic / recession concerns are in the driver’s seat over any weather forecasts, which basically puts us in a situation where a lot more attention will start to get paid to the new crop contracts, instead of the nearby front-month.
That attitude was omnipresent in the trade following last Tuesday’s July WASDE report from the USDA, as just-above-expected inventories for new crop corn, soybeans, and wheat made the sidelines more attractive than getting long again. Specific to the wheat complex and compared to the June WASDE, the USDA dropped global production by nearly 2 MMT, thanks to the harvest estimate in Ukraine and European Union both falling by 2 MMT to 19.5 and 134.1 MMT, respectively. As the table below shows, this was offset by Canada’s wheat harvest being increased by 1 MMT, America’s by 1.2 MMT, and Russia’s by 500,000 MT (albeit many private estimates still believe the Russian harvest could be a new record harvest above 85 MMT when all is said and done).
In this July WASDE, we also got the first production estimate for American HRS and durum production, which the USDA believes will rebound nicely. At 457M bushels of hard red spring wheat production (or 12.44 MMT), this would be up 54% over last year’s haul, while 77M bushels of American durum (or 2.1 MMT) would be more than double last year’s harvest. However, old crop domestic use of U.S. HRS wheat was lowered by 25M bushels, which meant ending stocks were raised substantially to 140M bushels. Thanks to strong domestic and international demand, the new crop 2022/ HRS carryout is expected to be even tighter at 126M bushels (or 3.43 MMT). Despite exports forecasted to double, the 2022/23 balance sheet for U.S. durum isn’t expected to be as tight as its HRS wheat brethren, with ending stocks of 30M bushels (or 816,500 MT) coming in 43%, or 9M bushels, higher than the 2021/22 old crop’s carryout of 21M bushels.
Looking at Canada, the USDA raised 2022/23 production and exports by 1 MMT each from the June WASDE, but there are many skeptics out there that Canadian farmers will be able to produce 34 MMT, given the slow start in the eastern Prairies and drier conditions in Alberta and western Saskatchewan. Some good rains have fallen but the recent heat wave seen across Western Canada is only likely to help the wetter areas in Manitoba and eastern Saskatchewan. More rain will be needed to replenish moisture in the western Prairies, but overall, the Canadian wheat crop’s potential seems to be trending upward towards near-average yields.
In some media interviews I did after the USDA’s July WASDE, I reminded farmers and other market participants that we never see higher highs in the middle of July, so let’s take the pull back with a grain of salt. More simply, this is NOT the time of year that I’m looking to contract grain, but focus on what I can control, which may include finishing spraying and penciling out my pre-harvest to-do list. As mentioned last week, this could also give your body and brain a break for a few days, and get away from the farm.
Weather will continue to play a role in the coming weeks. Still, most eyes are already on August when money starts to roll to new crop contracts, and other speculators may jump back in, depending on what fundamentals – namely supply potential – are looking like 2 – 3 weeks from now. Thereafter is the next WASDE report, released on Friday, August 12th, which will also include updated planted acres that weren’t yet seeded by June 1, when the surveying for the June 30th report was concluded. These updates will largely focus on what got planted after June 1 in the Dakotas and Minnesota. Until then, the reset of managed money will continue. Without a major weather scare or some other bullish geopolitical event in the next few weeks, the sidelines is where most dollars will stay.
Founder | Combyne Ag