Rain, Drought and Open Ports
Grain markets neared the middle of June on a rebound, with all but soybean oil and oats finding a green finish after the previous week’s sell-off. The front-month soybean futures contract in Chicago closed at an all-time high because of ongoing supply concerns and strong U.S. export demand suggested by the USDA in their June WASDE report, released this past Friday. Corn was also supported by a similar supply concern + stronger demand dynamic, while wheat values remain volatile on just how much exportable supply will be available this year. Weighing on broader markets is decades-high inflation, which has certainly been a contributor as to why this is one of the most expensive crops that farmers have ever put in the ground.
Before digging into this month’s WASDE – which didn’t provide too many surprises – negotiations continue for getting available Ukrainian grain out of country and alleviate accelerating food crises concerns. In my opinion, as well as that of many other analysts, it’s unlikely that anything will get moving soon, namely because Russia wants some sanctions lifted and no one expects world governments to capitulate, given the atrocities committed thus far in Ukraine. However, Singapore-based trader, Olam, believes that if negotiations are successful, there could be 8 – 11 MMT of wheat added to Ukraine’s 2022/23 new crop wheat export program.
Before the war in Ukraine started, the USDA was forecasting 24.2 MMT of wheat exports out of Ukraine for the 2021/22 crop year, but now they’re sitting at 19 MMT. Accordingly, UkrAgroConsult is estimating that there’s still about 4.8 MMT of wheat left over that should’ve been shipped out in the 2021/22 crop year. Looking forward, Rabobank believes that Ukrainian wheat exports will drop 10 – 12 MMT year-over-year to below 10 MMT, while the USDA’s expectations for the 2022/23 new crop year is that this number will plummet to 10 MMT even. Bottom line is that yes, Russia’s control of Ukrainian grain logistical infrastructure has been incredibly detrimental to global trade flows. Ironically, Russia’s wheat export forecasts continue to climb, with the USDA raising their expectations for both production and shipments by 1 MMT each from the May WASDE report, to 81 MMT and 40 MMT, respectively
Comparably, the USDA is expecting 21.5 MMT of wheat production out of Ukraine, but that’s on the high side of things compared to most private estimates, which are around the 20 – 20.5 MMT level. More broadly though, it’s important to reflect on the reality that, whenever this war ends, Ukrainian agricultural production won’t just rebound immediately to pre-war levels! This is important because Ukraine has been a large contributor to the global growth of wheat acres and production in the past decade or so. Further, with Russia occupying the area that owns nearly 7 MMT of Ukraine’s commercial storage capacity, there’s increasing concern that there won’t be enough bin space for first, the cereal harvest, and later, sunflower, rapeseed, and corn crops.
Looking at the above major wheat players, the USDA didn’t change too much in the June WASDE, save for Russia, U.S. production and carryout improving slightly, and EU’s production falling by 400,000 MT. On the last point, Agritel is currently suggesting that France is experiencing its worst drought since the 2011 and 2003 season, meaning that production could fall by more than 2 MMT to 31 MMT if June stays dry. Why this is relevant is because Agritel believes non-EU demand for French wheat will be at least 12 MMT in 2022/23, and as much as 13.3 MMT if Ukraine’s ports don’t open. The reality, therefore, is that global wheat prices could stay elevated as demand remains quite strong, but there’s not enough to go around.
Back home in Canada, some very timely rains fell in the driest parts of the western half of the Canadian Prairies, but as the soil moisture map below from Agriculture Canada shows, the area still needs more (NOTE: this most current map from AAFC came before the rains fell this past week in Alberta and western Saskatchewan). It’s the opposite in the eastern Prairies as there’s a very healthy soil moisture profile and some warmer, sunny days are desired. According to last week’s Manitoba provincial government crop report, just 65% of acres have been seeded in the province (5-year average is 96%), and compared to this time in June, crop progress is about one month behind its normal stage! Therein, a tale is starting to emerge for the Canadian Prairies’ growing season of “Too Wet or Too Dry”.
Overall, a lot continues to ride on Harvest 2022. More broadly, the June 30 stocks and acreage report from the USDA will set the tone for what’s likely to be a volatile July of trading, given the intense reactions lately to even the slightest deviation of average weather. This is also because La Nina conditions continue to linger, and as researchers at Columbia University’s IRI Forecast Group suggest, the Corn Belt could see below-average moisture this summer. Of course then, the flipside of this is that even the smallest prediction of rain in the Midwest would be construed as bearish for the corn and soybeans, which likely would spill over into other commodities. Therefore, the takeaway for coffee row is that Mother Nature and politics, as usual, seem to rule the day.
Founder | Combyne Ag