Market Insider

Wheat Pukes and Profits to Start 2022

Grain markets started the first week of 2022 with traders holding each other’s hair up while puking their positions and taking some healthy profits. However, the week ended with more buying and except for the wheat complex, the rest of the grain commodities actually ended the week in the green. Chicago SRW wheat finished the first week off 2022 at its lowest point since late November 2021, Kansas City HRW wheat dropped to values not seen since late October, and Minneapolis HRS wheat futures pulled back to levels not seen since early October. So, what the heck is going on in wheat markets?

Some of the futures sell-off was attributed to the now well-known larger wheat harvests in the southern hemisphere – namely Australia and Argentina – and how that could cut into demand for U.S. wheat exports. Also building some buzz is that traders are playing the spread of going short wheat and long soybeans. For the latter, it’s important to note that Brazil ag independent firm, AgRural, cut its estimate of the soybean crop by 11.3 MMT to now sit at 133.4 MMT, with national average yields projected to be the lowest in 7 years, thanks to the ongoing heat/drought in the southern half of Brazil. Even more bullish is the estimate from US consultancy, AgResource, who’s estimating the crop at 131 MMT.

Comparably, analysts’ estimates going into this week’s WASDE report (on Wednesday, January 12th) range from 131 to 143.2 MMT, with the average around 139.6 MMT. Regardless of what CONAB or the USDA prints this week, what won’t be reflected in the numbers is the excess rains that are delaying the start of the soybean harvest in Mato Grosso (Brazil’s largest producing state), and while the moisture will be certainly appreciated by producers in southern Brazil, 20% of the country’s soybean production regions remain in a state of drought. Similarly, rainfall in Argentina will be too minimal to ease any of the moisture deficit while in nearby Paraguay, 35% of the agricultural areas are also in a state of drought.

What does this have to do with wheat markets? Well, as mentioned, speculators have moved to a very short position in wheat in a very quick timeframe, offsetting their long position in soybeans. In fact, Andre Sizov of SovEcon noted this week that managed money’s net-short position of more than 23,000 contracts in Chicago’s SRW trade is the most bearish the market has been since July 2021. However, Mr. Sizov also notes that, in the 3 times this past year that the net-short position in Chicago wheat has gone to a net-short position above 20,000 contracts, wheat markets have rallied every time.

This time might be different as there is more known about the existing supply situation than the previous 3 times in the past year that Chicago wheat fund positions were this bearish, which was late March 2021, early July (as mentioned), and mid-October. Therein, because the front-month contract is largely a function of the nearby trade, there are still a couple of notable bullish factors for new crop, 2022 wheat markets that speculators will start moving their attention to. In fact, comparing the nearby 2022 new crop futures contracts, the wheat complex didn’t see as much of a sell-off this past week, especially HRS wheat.

Further, this week, as part of the USDA’s large January WASDE data dump, analysts are expecting to see U.S. wheat inventories, as of December 1st, down nearly 17% year-over-year to 1.42 billion bushels (or about 38.7 MMT), the lowest sine 2007. One of the other factors is the USDA’s update of U.S. winter wheat acres seeded this past fall, which are currently estimated at 34.3M, up 1.8% from the 33.7M in 2021. However, it’s important to note that, in 3 of the last 4 years going into the January acreage print, the average pre-report guesstimate has actually underestimated the actual number published by the USDA.

Also, as I’ve mentioned many times in Wheat Market Insider columns in the past, dry weather in the U.S. Southern Plains remains significant. As of last week, in Oklahoma, which is the 2nd-largest winter wheat producer in the U.S., 90% of the state is experiencing some level of drought; this is up from 79% a week prior and 73% three months ago. Meanwhile, in Kansas, the #1 winter wheat producing state in America, 50% of the state is now in some level of drought – up from 33% a week earlier and 15% three months ago – and just 33% of the crop is rated good-to-excellent, which is down from 51% a month ago and the 46% print a year ago at this time. Put another way, the fundamentals of the wheat market haven’t changed, but investors have just tip-toed over to the sidelines a bit more as the rally over the last 2 – 3 months have been more than enough to pull the profit trigger and wait for the next opportunity.

To growth,

Brennan Turner

Founder | Combyne Ag