As of this morning, Chicago wheat has rallied $1.50 from its low put in place on the 8th of March. While wheat gets a lot of grief from grain traders as being volatile and difficult to pin down, it tends to be a quiet leader to the entire ag complex, whether folks want to admit it or not. Wheat was what started the run up in grain prices in late 2020 when production reductions due to low margins for growers around the world ran into unexpected yield losses. Higher wheat prices then encouraged an increase in global production that was able to help keep world end users supplied even when faced with the world’s largest exporter invading its neighbor.
Wheat was also the first to complete the cycle, going from near record low prices to near record high and back to pre-invasion levels all within a few growing seasons, bringing us back to where I started, the low the July contract hit on March 8th.
Some may look at a wheat chart and then look at the numbers released by the USDA last week and scratch their heads, as there is no shortage of production or supplies on paper. However, the recent rise in global prices would say something is afoot, and to a certain extent it is, as wheat production around the world seems to be experiencing some issues.
Russia is where the epicenter of production worries lies currently and for good reason, as a stretch of drier and warmer than normal conditions gave way to much below normal temperatures. Winter grains and early planted crops were said to have been damaged by the multiple freezes seen in different parts of the country last week and over the weekend. While some say the damage to wheat is minimal where the freeze events occurred, others believe production could be as low as 81 mmt, well below the outlook for around 93 mmt that we started the season with.
Larger than normal old crop supplies still on hand will help to offset some of the production losses currently being discussed, though with much of the old crop ownership said to be in the hands of farmers, market liquidity could be lacking until growers get a better feel for new crop production.
Russia is not the only area struggling with production issues, as France is experiencing one of its worst starts to the wheat growing season in four years. A poor stretch of fall weather is believed to have reduced French wheat acres by nearly 10% already, with thoughts we could see further reductions after a cold wet start to the spring has increased the likelihood of abandonment. Officials rated the crop 63% good to excellent last week, 30% below last year’s 93% rating and the worst since 2020. Signs of trouble can be seen in NDVI ratings as well, as they fall below normal for this time of year.
Too much rain in the Eastern Corn Belt is likely to cause issues with Soft Red Wheat production. Wheat can handle all types of conditions, but after a while it really starts to struggle when conditions are too wet. The USDA reduced their SRW production outlook in last week’s report, surprising traders by coming in over 100 million bushels lower than last year. While much of the reduction in production was attributed to lower acres, the door is now open to even greater issues if we were to start to see yield reductions.
Weather is the dominant factor when it comes to corn and bean direction as well, with flooding in Southern Brazil, dryness in Central Brazil and too much moisture across the Corn Belt causing concern. The flooding seen last week in Rio Grande do Sul is thought to have reduced the soybean crop outlook there by around 2 mmt, with additional losses to beans in storage expected. Heavy rain is forecast to return to the area, adding insult to injury and keeping harvest progress limited, with some fields more than likely soon to be written off completely.
Here in the US, heavy rain has helped replenish some of the drier parts of the country, with the amount of area experiencing drought falling considerably over the past few weeks. While rainfall is welcome throughout the growing season, the frequency at which systems are cutting across the country is problematic as we are trying to get the crop planted.
While for the most part, many growers have been able to squeeze in a considerable amount of planting in their small windows of opportunity, there are some parts of the country barely able to turn a wheel, with it looking like at least another 10 days before we see the rain stop--and that’s only because the forecast doesn’t stretch beyond that point.
With extended forecasts calling for above normal rainfall through the end of the month, there will be places that could be looking at June on the calendar before they are able to see decent progress.
Up until 2019 I was of the belief we would always get the crop planted, however, that year I watched in horror as half the county at the heart of my trade territory was unable to get seed in before time ran out. I am not saying it is 2019 by any means, however, with the current forecast there will be parts of the Corn Belt looking at it being late May before they get a meaningful start. With farmer sentiment sitting at a multiyear low, prices may have to do some heavy lifting to convince the growers in the wettest parts of the country to roll on.
It may be a case of the tail wagging the dog, but in addition to weather I will continue to watch money flow. Many traders were surprised to see greater than expected short covering in last week’s Commitment of Traders report, with the speculative corn short basically cut in half last week. With the wheat short down to a small sliver of what it was and the bean position nearly even, we can’t really call for short covering now, as much of it has been done. It is interesting to note farmer selling was incredibly aggressive last week in corn, something that was evident in the extent of price movement we were able to see in the face of one of the bigger stretches of fund buying we have seen in quite some time.
With it being rare to see funds sit simply even, it is very possible we see some follow through buying, especially with all the weather issues we seem to have popping up—though as I said, the mantra of big gains coming from impending short covering is one that will have to be retired, at least for now.
In the end, we have ourselves the making of a good ole fashioned weather market as we head into what is historically the most uncertain time of the year. As always, don’t hesitate to reach out with any questions. Have a great week!
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
