Market Insider

Wheat Adds More Weather Premium

Grain markets were mixed to start the month of May, but wheat was the clear leader as supply concerns continue to drive a bullish narrative. Corn and soybean prices pulled back on the prospect of drier weather and Plant 2022 operations accelerating this week. Corn prices are expected to stay supported by this late start to the U.S. Plant 2022 campaign, strong ethanol margins, and drought conditions negatively impacting Brazil’s safrinha / second corn crop. In Brazil, the USDA is currently forecasting 116 MMT of total crop year production, but some private forecasts are as low as 104 MMT because of deteriorating conditions in the south. As new crop pricing goes though, there’s speculation that corn could still hit $8 USD/bushel before the end of May, which would likely support wheat futures.

In non-weather news, Australia and New Zealand have approved the sale and use of foods that contain a GMO wheat variety developed by the Argentine firm, Bioceres. The HB4 wheat strain is said to help withstand droughts and herbicides and is an interesting development amidst the growing global wheat supply concerns (AKA one we could see more of, should supply issues remain a problem). Adding to the bullish supply variable are hotter temperatures in Europe providing some weather premium to wheat futures, while 115 F / 46 C degrees were seen in India, negatively impacting the wheat crop there. Wheat futures found some support from rumours that India is going to limit their exports because of the hotter conditions impacting yields, but the government denied any protectionism is on the table.

The biggest spotlight for wheat’s weather continues to be in the Southern Plains where hotter temperatures and a bit of rain are in the forecast this week for the U.S. Southern Plains, but it’ll be too little too late for a lot of the winter wheat crop there. This past week, the Oklahoma Grain & Feed Association suggested that 2022 wheat production in the state will be about half of last year with an average yield of just 23.5 bushels per acre (39 bu/ac in Harvest 2021). Next door, the CEO of Kansas Wheat admitted last week that in the southwest, the driest part of the state, most of the crop has already been zeroed out by adjusters, which is significant considering that this area represents at least 5% of all wheat planted in. Next week, we’ll know more as from May 17 – 19, the annual Wheat Quality Council tour will take place.

In last week’s Wheat Market Insider column, we looked at Statistics Canada’s first forecast of how much area will get planted for each crop, focusing on the implications for non-durum wheat supply and demand tables. This week, we’re digging into how durum acres jumping 13% compared to Plant 2021 (and the 5-year average) will impact prices in the 2022/23 crop year. Of this nearly 700,000 year-over-year increase in Canadian durum acres, all of it is attributed to Saskatchewan and then some, as Alberta farmers are expected to plant less durum this year. At 6.22M total acres, there is a lot of potential for a major rebound in Canada durum supplies.

However, we’re following a drought and conditions haven’t improved materially in a couple of durum-producing areas, especially southern and western Saskatchewan. While Agriculture Canada believes average Canadian durum yields in 2022/23 will rebound perfectly to average levels of around 34.2 bu/ac, my model is less optimistic, suggesting a per acre haul of around 28.5 bushels per acre (2021’s drought-driven average yield was 18.3 bu/ac). Part of the rationale here is that in years following a drought, average Canadian durum yields have only rebounded by 3 – 7 bu/ac, meaning my 10 bu/ac year-over-year forecast is already on the high side. Net-net, at 28.5 bu/ac, across 6.22M acres, at an average harvest percentage of 98% of planted acres, this would produce less than 5 MMT of durum.

However, the demand for durum remains strong globally, especially given the lagging impact of last year’s drought on the North American crop. North Africa seems to be at the losing end of Mother Nature’s blistering bite this year as tough conditions will surely lower production in a region known for its need to import durum. Early expectations in Morocco alone are for a harvest that’ll be just ¼ of last year’s bumper crop! Therein, Canadian durum exports should remain elevated, especially to Morocco which will likely import more than the record 1.3 MMT they set in the 2020/21 crop year. However, North African countries will be able to source from Europe as well, where, despite some hot weather this week, the durum crop conditions remain favourable, especially in France. Nonetheless, Canadian and global carryout will remain tight, and, barring the unlikely event of a record harvest in North America AND Europe, prices could eventually rebound to, or at least close to, the highs we’ve seen this past year.

To growth,

Brennan Turner

Founder | Combyne Ag