For Wheat, A Year Of Extremes
When we look back at this past year in the wheat market, we can certainly say it was indeed a year of extremes.
Here in the US, we had historically low winter wheat plantings to set the stage. Hard red winter wheat was off to an impressive start in the central and southern plains and just about to move into the final stages when a series of freezes followed by a huge snowstorm moved across the plains. Fields in the western central plains saw as much as two feet of snow, flattening fully headed out wheat. It was a sight to see and a major mess; the crop tour came through shortly after the storm and couldn’t even asses some fields because they were covered in snow. Yield losses were significant and what had been an optimistic outlook quickly turned pessimistic – again.
While the central plains were dealing with cold and wet conditions, the northern plains were in the early stages of a drought that only intensified as summer progressed. The epicenter of the drought was over durum country but included almost all the spring wheat region and stretched up into Canada as well. Spring wheat production took a hit, but for the first time in years we saw good protein levels here in the US and in Canada.
Coming into this production season, the world had record carry-over stocks for the fourth year in a row. Most analysts agreed that in order for wheat to have a chance at a bull market, we needed a major production loss in at least two major producing countries.
It certainly looked like that was going to happen, until Russia started talking about another record crop – their second in a row. The production estimates coming out of Russia increased almost every week in June and July, and by the time harvest began the world knew a phenomenal grain crop was on the way. The latest estimate on Russia’s wheat crop from USDA is 83 MMT, but private Russian analysts peg it even higher.
Last year’s record crop was 72.5 MMT, almost paling in comparison to this year.
But then in mid-summer, grain prices took sharp turn higher, led by corn and soybeans when it looked like the northern plains’ drought would expand into the Midwest. Grain prices surged for three days, and then flamed out as rains arrived and saved the crop just barely in the nick of time.
The short window of optimism for higher wheat prices was quashed by the collapsing row crop prices and the massive Russian wheat crop. Added to the bearishness was an announcement by the Russian government in the fall that they would subsidize grain transportation to the ports, and then warm weather extended shallow-water port loading well into winter, much longer than normal.
As the world came to grips with Russia’s huge stocks, Australia had its own disaster. Drought welcomed the new growing season and then heavy rains pounded the mature wheat at harvest. After a record crop last year, Australia had a wipeout this year. To wrap up this production season, world wheat production was 2 MMT more than last year, but ending stocks will be 13 MMT higher.
Russia has dominated world price setting, and it’s been mostly lower since the sharp summer rally. It is worth noting, however, that Russian sales to Egypt this December are actually $8/MT higher than in January of this year.
Another thing certainly worth noting is that basis rose substantially this fall while futures steadily worked lower. With basis at three-year highs, the cash market is trying to tell a different story than futures. Heavy fund selling since summer, especially in corn, is keeping futures price rallies subdued. However, end-user demand has been strong, particularly for higher quality wheat domestically and abroad. The one shining light for wheat prices continues to be for higher quality wheat. Years of low production of high protein around the world is setting up the market for increased volatility in the premiums and discounts.
As we look to next year, we expect that winter wheat plantings will be down again, likely mostly in hard red winter wheat. Crop conditions were declining as it went into dormancy, and a major cold snap as this is being written threatens to stress much of the crop across the plains as snow cover is sparse. Spring wheat acres will likely be down as well, but that market still has time to buy some acres back, which I believe it will try to do.
At some point, the wheat market will care that US plantings have plummeted, that major producers have had disasters and that quality supplies are very tight. Yes, Russia was the fly in the ointment this year, and okay, last year as well. They have succeeded in their quest to regain world dominance in the wheat trade. You have to be impressed. That said, we all know that every year won’t be a banner one for them. We also see that at $4/bu, buyers are willing to step up.
I don’t expect to see wheat prices get below $4/bu on the futures, for either Chicago or Kansas City. There is a chance that Chicago will gain on KC if Argentine weather stays hot and dry during January & February, which would support corn prices and thus Chicago wheat. But KC won’t stay discount to Chicago for long and so look for trade opportunities there. Minneapolis futures have a big job to buy back acres, so things could get interesting in April/May.
The wheat market isn’t dead, it just seems that way. We’ve seen this market light up before when the stars are aligned. Don’t give up hope; even with record world carry-over, the stage is set for fundamentals to change quickly. Just need a little help from Mother Nature to get us started, and those massive short positions held by the large traders could be what propels us higher.
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