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Is the wheat story over -- or just beginning?

Getty/iStockphoto Field of wheat before harvest.
Lower global production, strong demand equals profit opportunities.

Like most agricultural commodities, wheat futures prices have trended higher since August of 2020.

For nearly a year, wheat futures followed the corn and soybean market higher. Wheat was the follower as it was the corn and soybean markets that suddenly received the fresh friendly fundamental boost from news related to lower supplies and increased export demand. Wheat was the follower that entire time as global supplies were deemed sufficient, and global production was mostly normal. After all, wheat is a crop grown in nearly all parts of the world, and available nearly year round.  

Practically everyone grows wheat

The thing about wheat is that it is grown all over the world, in both hemispheres, and so supplies are available nearly year round. The largest producer of wheat is the European Union (France and Germany are the leading countries within the EU), with China and India close behind with very large production capability. Next is Russia, the United States, Ukraine and Australia, with most of those countries exporting nearly half if not more of the crop they annually raise.

Naomi BlohmTop 10 wheat producing countries for 2021/22

For the past few years there have been record large ending wheat stocks on a global scale, which kept prices suppressed.

Because so many countries grow wheat, if one nation had a weather issue to compromise production, there were plenty of other countries to make up for it.

Bar chart of word production and use of wheat.

Supply hiccups

However this year, there have been production hiccups in many locations, which has brought down global supply.

The United States, Canada and Russia had production loss due to heat and drought. There has also been quality and yield loss issues in France and Germany due to flooding. In France, a decrease in the average quality of soft wheat this year will likely lead to an increase in flour prices.  And now dry weather concerns are on the rise for Brazil after frosts that hit wheat crops in late July.

Demand is strong

Smaller crops in the United States, Russia and Canada suddenly have end users perking up as their method of “just in time” buying mentality may have caught some off guard as prices across the wheat complex began to soar to near ten year highs. Higher prices and lower supplies are being felt around the world.

Ample supplies of wheat in China (in the form of ending stocks) helped keep a lid on global wheat prices for much of the last five years. Looking back, ending supplies of wheat in China peaked in 2019-20 at 150.5 mmt, with projected 2021-22 ending stocks of 141.6 mmt. How much of this ending stock supply of wheat that is deemed truly useable remains a question. (Similar to that hefty pile of corn ending stocks China hoarded for the past five years.)

Chart of world ending stocks each year of wheat

In recent years Chinese demand has been outpacing annual production. However, they had plentiful ending stocks to dig into in order to meet that deficit. For example, in 2020-21, the difference between Chinese production and demand was a shortfall of 16.5 mmt.

But then something interesting happened: rather than China dig into that reserve pile, we saw China increase wheat imports to 10.6 mmt, the largest in 25 years. Why?

Looking ahead to 2021-22, China is expected to have a deficit of 13.0 mmt, with imports currently projected by USDA at 10.0 mmt.

U.S. wheat exports

Who is sending wheat to China? The United States has captured some of that business.

So far, August inspections of U.S. wheat exports have been up from for this time last year. For the week that ended Aug. 19, wheat export inspections totaled 657,854 metric tons, up from 560,640 tons the week prior. Inspections of wheat destined for China totaled 169,541 tons, making China the leading destination!

Price opportunities

When looking at pricing opportunities for wheat, Chicago wheat prices continue to have a hard time being able to surpass the $8 futures mark. After three attempts so far in 2021, the $7.70 area is about as good as it gets, with the elusive $8 mark just a pipe dream.

082621Blohm Aug 2021 Wheat chart (002).JPG

Looking back at history, $8 futures is heavy resistance from a technical standpoint. Could prices breach the $8 mark? It will take a continued story in lower global production. And that is up to Mother Nature.

Where do prices need to be for wheat in order for you to be profitable?

Reach Naomi Blohm: 800-334-9779 Twitter: @naomiblohm and [email protected]

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The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

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