Wheat finds more buying, hits 6-year high, analyst says

South America’s upcoming harvest could limit gains, analyst says.

In the last month, the fundamentals for wheat have had a significant shift.

We’ve watched the dryness continue in southern Russia, the major supplier for the world’s largest exporter. Farmers in that area have been slow to plant winter wheat and are holding back recently harvested supplies. But exporters’ aggressive forward sales during the summer must now be delivered, and the slow farmer sales are forcing exporters to source from deeper in the interior, driving up export costs and thus world prices.

Added to the Russian exporters’ headaches are now rail logjams slowing the movement of wheat from the interior to the ports. Moving massing quantities of wheat on rail is stressing capacity and creating bottlenecks in the delivery system. Reports of numerous empty vessels waiting for fulfillment suggest the problem is serious.

Pulling wheat away from the interior has pushed up flour prices to near record highs. The Russian ag minister is about to announce what the tariff rate quotas will be for Russian exporters beginning in January. Sky-high flour prices could prompt export restrictions, even though Russia had a near record wheat crop this year. In fact, recent harvest reports suggest that spring wheat yields were even better than expected, so total Russian production could be increased yet again, which would put them in record territory. 

It will be interesting to see just what the ag minister does, given their huge crop and need for revenue, but still wanting to keep domestic prices in check. Any restriction on exports would be bullish for world prices. Russian FOB offers finished last week around $250/MT, up $5/MT from the previous week, and up $25/MT (about $.67/bu) in the last four weeks.

We also saw our own southern and central Plains’ dryness continue, which will likely lead to fewer planted acres of hard red winter wheat and poor establishment before winter arrives. Last year was already a record low for plantings. Dryness has also shaved yield from Argentina’s wheat crop in its final stages. While Australia is on track for a huge crop, forecasts calling for excessive rain in the east for the next couple weeks are creating worry about quality on mature wheat. It appears that the La Niña weather event is having a typical result with dry conditions in Argentina and wet weather for Australia.

So, the huge production expected from the Southern Hemisphere isn’t going to be so huge, but it will still be big and will show up in the world pipeline starting late this month. Chicago wheat would likely be pressured the most, as its soft wheat contract will compete with Australia’s soft wheat. That said, if dryness keeps us in a weather-driven bull market, more speculative trade will flow to the wheat space and Chicago will be the primary recipient, thus supporting Chicago at least in the near term.

Ultimately, the weather issues are affecting hard red winter wheat from the two biggest producers and exporters in the world – Russia and the U.S. We can see the market acknowledge this by watching the new-crop Kansas City/Chicago spread (July 2021), which has gone from 75¢ difference to 33¢ difference, over the last 10 weeks. Kansas City has been discount to Chicago for a few years, thanks to very tight supplies of soft red wheat, but eventually the supply situation will correct itself, and Kansas City will return to a normal price relationship with higher quality hard wheat being more valuable than soft wheat.

Export sales last week were a respectable 600,000 metric tons. We saw China take 55,000 metric tons of hard red winter. Marketing year-to-date sales are 15.2 million metric tons, up 9% over last year and on pace to meet USDA’s projections.

Wheat surged to a six-year high last week, led by Chicago with the front month December gaining 31¢. Kansas City moved 23¢ higher and Minneapolis was up 16¢. Corn added some support on additional China purchases and planting delays for Brazilian soybeans, which will make their second season corn crop late. U.S. corn futures were up 7¢ for the week.

I look for wheat to struggle to maintain this upward momentum, mostly because harvest is gearing up in the Southern Hemisphere and the world pipeline will be filled quickly. I would expect the downside to be limited until we get soaking rains in southern Russia.

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