April 11, 2022
Corn and soybeans got the party started during the bull market that began in 2020. But wheat did the heavy lifting for much of the past year, helping lead a surging commodity sector to what some hope is another super-cycle.
Wheat could continue to pace the market this spring, even as traders obsess over corn and soybean plantings and acreage. While hard data on spring crop production is months away, it’s time for winter wheat to take mainstage.
The spotlight focused last week on USDA’s first report this spring on nationwide conditions, which showed winter wheat off to its second worst start since 1986. Just 30% of fields were in good or excellent condition, about 20% less than normal, suggesting a nationwide yield of 48.2 bushels per acre, 7% less than expected and 2 bushels per acre below last year. That could leave total winter wheat production slightly lower than last year, despite a significant increase in seedings.
Crop ratings appear in line with readings from the Vegetation Health Index as well as soil moisture conditions, which show more than two-thirds of the winter wheat area in drought. Nearly half the spring belt on the northern Plains is also dry.
To be sure, there’s plenty of room for statistical variance in any yield estimates so soon after emergence, when heading has just begun . The margin of error is around 4 bpa – 100 million bushels either way. But even if yields recover, the supply left over in the U.S. at the end of the marketing year May 31 could be the least since 2013.
USDA won’t release its first monthly estimate of new crop winter wheat production, along with total supply and demand, until May. The agency Friday put expected 2021 crop ending stocks at 678 million. If that number holds, new crop carryout could fall below 500 million in the coming year, increasing potential for the rally to get another leg higher.
Winter wheat yield estimates dropped after last year’s first ratings in April . Then the market really took off when severe drought on the northern Plains cut spring wheat yields to 20-year lows, with disappointing production in Canada and parts of the Former Soviet Union help sending prices to new highs last fall even before the recent spike caused by Russia’s invasion of Ukraine.
Russia is the world’s largest wheat exporter, and combined with Ukraine accounts for 25% to 30% of shipments globally.
Below normal soil moisture already is present is Ukraine’s wheat fields, which may not receive timely applications of fertilizer and chemicals this spring due to disruptions from the war. This includes some of the country’s biggest production areas, which are controlled by Russia in the south or close to disputed parts of eastern Ukraine. Still, the overall VHI for Ukrainian wheat nationwide is running close to normal so far, pointing to decent yield potential if the crop can survive its many obstacles.
Questions about shipments out of Russia and Ukraine linger, with potentially a huge impact on prices. That’s because wheat is a true global market, one that follows world factors more closely than supply and demand in the U.S. alone. The number of days’ supply around the world, excluding China, is expected to fall to the lowest level since 2007 on May 31, and could tighten further during the 2022-2023 marketing year.
Average U.S. cash prices could near $9 as a result, compared to the $7.60 USDA currently forecasts for the 2021-2022 crop. During the surge after Russia’s invasion, all three futures markets for new crop wheat in the U.S. traded into or through the top third trading ranges forecast by my pricing model.
Soft red winter wheat, the smallest futures class, performed the best, in part because it’s the most widely traded contract and often used as a surrogate for world prices. Chicago July has a intraday top of $12.7825 and a high close of $12.5225 high close; the forecast of my top range is $9.96 to $10.86.
Hard wheat contracts didn’t rally that much but still are in double digits. July hard red winter wheat has a intraday high of $12.59 and a closing high of $11.7825. The top third of my selling range $10.48 to $11.36.
In Minneapolis, new crop September has a $11.17 high and a $11.095 high close; its top third range is $9.72 to $11.11.
While the statistical accuracy of early crop ratings is suspect, the initial reports do sway markets, sometimes tipping a major move. December HRW futures in normal years tend to weaken after ratings start up again, with confirmation from USDA’s May production estimates sending prices lower into harvest. By contrast, in bullish years futures hold attempts to break and never look back on their way higher from harvest lows.
Knorr writes from Chicago, Ill. Email him at [email protected]com.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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