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323171

For wheat traders, the Russia/Ukraine conflict threat is top of mind, analyst says

Russia and Ukraine account for about 30% of world wheat exports.

There are many reasons the grains are coming off of a strong week, with each market having its own bullish fundamentals.

And, of course, they are also feeding off each other as they move higher.

For wheat, there are three significant factors in play: Russia/Ukraine, weather in the U.S., and skyrocketing world feed grain prices.

The Russia/Ukraine geo-political issue has moved to top priority in the wheat space. Ineffective diplomatic meetings and the increasing troop and arsenal buildup by Russia, just a stone’s throw from the Ukraine border, have greatly increased the likelihood of an invasion. The wheat and corn markets are bracing for grain export chaos to develop if that were to happen.

There is little doubt that an invasion would be bullish wheat and corn as Russia and Ukraine account for about 30% of world wheat exports, and Ukraine exports about 16% of world corn exports. An invasion would create chaos within Ukraine and embargoes against Russian grain exports. With world major exporter stocks/use ratios already nearing or at record low levels, any disruption in export flows sends prices sharply higher.

While corn and wheat build in political risk premium, weather conditions are still rough here in the U.S. for winter wheat. Drought conditions developed across the southern plains last fall and are continuing through the winter, and most of the northern Plains is still stuck in its massive drought from last year.

Winter wheat crop conditions have plummeted since fall, and it doesn’t look like Mother Nature is offering much relief in the near term, increasing risk for spring crops as well.

Weather conditions are also still rough in South America as corn and soybeans move through their growing seasons. A very dry and hot start to Argentina’s growing season delayed a great deal of their corn planting, with some 8% still left to plant. There is growing market chatter that perhaps farmers will opt not to plant the remaining as it will push up against frost dates.

Recent rains have been crop saving, but severe damage has already been done. Production estimates for Argentine and southern Brazilian corn have declined about 20 MMT, a huge amount in a normal year –which this is not. Those production losses will come out of world exportable supplies, with buyers looking to the U.S. – or Ukraine – to fill in the gap. But if Ukraine is in political chaos… then it’s just the U.S. supplying corn through the summer – a major bullish potential which isn’t that unthinkable.

If corn shoots higher, wheat follows to keep supplies out of the feed grain channel.

Politics, weather, tight carryover stocks all point to a bullish outlook for grains, at least into the seeding time frame. I look for wheat to follow normal seasonal patterns but have more strength to the rallies moving forward now that the world has digested record Argentine and Australian production. We normally have a rally into early February, and I expect to see that this year. I would look to price winter wheat if it is a strong rally.

We also tend to see grains rally into early May, in a typical battle for acres, and I fully expect corn and soybeans to duke it out like last year and create another selling opportunity. Replacing some of those sales with call options isn’t a bad idea since any hint of weather issues would send prices on another leg higher.

Lat week, wheat markets staged an impressive rally to start the holiday-shortened week. The first two days had wheat surging well over 50¢, only to stall out Thursday and Friday in a slight profit-taking pullback.

For the week, Kansas City was 4¢ higher but 13¢ off its high; Minneapolis was 58¢ higher but 15¢ off its high; and Chicago was up 38¢ but 22¢ off its high. Corn was 20¢ higher and just 2¢ off the week’s high, while soybeans were up 57¢ and 15¢ off the high.

———————
Louise Gartner,
Spectrum Commodities

Listen to my podcast on wheat and cattle: http://spectrumcommodities.podbean.com/

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