After a slight pullback, wheat markets managed to reach a new 13-month high this week, still riding the weather market fears of the drought in Russia, and the expectations of heat-reduced yields in Europe. Funds continue to be heavy buyers of wheat as they’ve gone from a net short to a net long in just one week, not to mention erasing a huge net short position that they had just a month ago.

 While the market watches the drought wreak havoc on spring crops in Russia and Kazakhstan, they are also just getting the early results of the European harvest which kicked into high gear this week.

Early French reports showed better than expected yields and good quality. However, Germany is seeing a yield decline from the late hot weather, and they are projecting that total wheat production will be down 10-20% from last year. Germany also had some rains that delayed harvest which could hurt their quality as well. Spain is already 70% done with harvest and their yields are improved over last year’s drought ravaged crop; they expect total production to be up about 16%.

Further east in the Former Soviet Union states, Ukraine projects that wheat production will be down about 2.5 MMT from last year at 18.5 MMT; that compares to USDA’s latest estimate of 20 MMT. Ukraine’s wheat prices have risen about 20% in just the past week. Kazakhstan is projecting about a 35% drop to about 14 MMT, equal to USDA’s latest estimate.

And then we get to Russia, which is certainly a mixed bag. Basically, their wheat production has been left about unchanged because they were well into their winter wheat harvest before the drought blew up on them. It’s the spring grains that are being hurt, and the total grain production estimates are all over the map. The Russian government projects total grain production to be about 85 MMT, while the Russian Grain Union has it between 81-85 MMT, and SovEcon is much lower at 75 MMT or less. This compares to the last two years of total grain production out of Russia of 108 MMT and 97 MMT. Russia is already releasing government stocks into the domestic market to ward off potential food inflation.

 One of the barometers we were using to measure the aggressiveness of continued Russian wheat exports was to see how they would respond to the key Egyptian market. They did respond to the latest tender by once again capturing the complete sale of 120 TMT, but at prices a good $.77/bu higher than just two weeks ago. There is little doubt that Russia will do all they can to retain those hard-won markets even though grain production is lower but it is very unlikely that they will risk lowering domestic stocks too much.