Louise Gartner: Prices surge on expanding Russian drought
Wheat markets spiked higher this week as drought conditions doubled in size through Russia and Kazakhstan. Hot and dry conditions also continued to plague northern Europe early in the week until relief finally came late in the week. European and US prices jumped to their highest levels in 13 months, as world production prospects continued to be ratcheted downward after temperatures reached more than 100 F in those key production regions just as the winter wheat crop was trying to fill and spring grains were still in their early stages.
Just a week ago, USDA issued their July supply/demand report and did shave production estimates for Europe as well as Russia and Kazakhstan, but already those numbers are outdated as those countries reduced expectations even more.
SovEcon estimates that Russian wheat and barley production will be 60-64 MMT, sharply lower than the official Russian government’s latest estimate of 85 MMT. They left Russian wheat production unchanged at 49-51 MMT, still lower than USDA’s latest estimate of 53 MMT. SovEcon expects total Russian grain production to only reach 75 MMT, compared to last year’s 97 MMT crop. Ukraine has the opposite problem with too much rain as they’re trying to harvest, forcing them to also lower their wheat projections to 18.6 MMT, compared to USDA’s target of 20.0.
Informa projects the total Former Soviet Union will see 95 MMT of wheat production, which is down 6 MMT from last month’s estimate and still 6 MMT less than USDA’s latest estimate. They forecast Russian wheat production at 51 MMT, 2 less than USDA; and Kazakhstan at 11 MT, 3 less than USDA.
Germany lowered its total grain production forecast by 3 MMT from last month’s estimate to 44.2 MMT, which is down from last year’s 49.7 MMT. In their latest monthly estimate of total EU soft wheat production, Strategie Grains gave a forecast of 129.5 MMT, down 3.6 from last month, but down just .3 MMT from last year. Most of the reductions came from Germany, the Benelux, France, Poland and Britain. In an ironic twist, on the eastern side of the 27-member bloc, Bulgaria, Hungary and Romania were getting too much rain which was also expected to reduce yields. Barley production is also projected lower across Europe and into the FSU, estimated down 13% in Europe from last year.
While the weather problems are certainly serious, we’ll try to keep things in perspective. Certainly, world wheat production and stocks will be down this year, but large carryovers from the two previous years of record crops will ensure plenty of stocks for world usage. However, the constant price pressure from Russia and even the EU will likely be much less this year.
That said, there is no doubt that Russia will do all it can to retain the new markets they’ve won over the last couple of years. World prices will likely be higher than last year, but Russia will still be a major exporter, probably just lower volumes. The Europeans will likely be more conservative in their exports but their euro currency weakness could still keep them competitive. It’s also important to keep in mind that India has huge stockpiles of wheat that they would welcome the opportunity to be competitive with, so at some point higher world prices could bring India into the mix as well.
So, what does all of this mean? I think it means that for starters, world prices will be higher this year than last; the US should see a stronger export program than the last couple of years; wheat prices will likely trade in a large trading range of which we’ve obviously seen the lower end, and likely are close to seeing the top end as well, presuming that corn and beans don’t run into weather problems.
Bottom line, we’re in a weather market centered on Russia and Kazakhstan that came late for winter wheat so it won’t be a complete disaster for their winter wheat production. However, their spring crops are heading for disaster and the forecasts don’t offer much relief in the next two weeks with the hot and dry sukhovie winds coming. It appears that northern Europe will get some relief in temps as they head into winter wheat harvest. Here in the US, we still have to get corn and beans through their critical pollination stages just ahead of us to avoid more weather issues. The high pressure ridge that was forecast for the Midwest earlier this week is expected to dissipate without creating lasting damage.
Price action is performing like a typical weather market, with a huge spike in futures but cash hardly noticing as the basis plummets. These are opportunities to sell into the strong futures with either a fixed futures or directly on the futures market, and wait for the basis to recover before locking in the rest of the cash sale. Retracements in price should be well supported and should offer opportunities for producers to re-own wheat with a call option or an option spread.
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