Wheat market's weather premium deflates

Cold snap appeared to only do minor crop damage in Oklahoma.

After a brief higher start to the week, wheat turned south and stayed under pressure most of the week before finally getting a reversal up on Friday.

For the week, Kansas City was down 13-cents; Minn down 26-cents and Chicago down 23-cents. Corn fell 9-cents and soybeans were down 31-cents.

The potentially bullish factors that offered support last week dissipated this week. From what has been assessed so far, the early week cold snap that reached far into Texas appeared to only do minor damage in Oklahoma. So, we saw some weather premium deflation in response.

In addition, the dry spell that has hovered over the Black Sea all spring also appears to be dissipating. Light rains this week look to be followed by more heavy and widespread rains next week. This is a very important rain event; if it doesn’t materialize, I would look for wheat markets to surge higher as yield reductions will likely begin in the key producers of Ukraine and Russia. 

Those two countries are already looking at restricting old crop exports, and any sign of production problems will surely extend those restrictions into new crop. We are already seeing evidence of that in Russia as the Ag Minister on Friday warned that their 7 MMT export quota from mid-April to end-June could be met as early as mid-May. If that were to happen, they would shut down exports and consider restricting sales into the new crop year.

For all the world’s plentiful stocks of wheat, it is important to keep in mind that half reside in China and will stay there. US stocks are plentiful with adequate milling grade supplies. The Black Sea had decent production last year but domestic prices in Russia and Ukraine have steadily moved higher over the last several weeks, leading to the tight monitoring of exports. Any hint of production problems in those key countries and wheat prices move sharply higher.

That said, if the rains come for that region, we could be looking at record production in Russia with their 5% plantings increase. Ukraine’s plantings are slightly lower than last year, as is Europe’s. Here in the US, our steady move away from wheat acreage is providing support for the Kansas City market, where acres are down again this year to a record low. Soft red acres are higher and yield prospects much better than last year’s disastrous season. And, according to the plantings report, spring wheat acres look to be higher as well.

These are trying times with COVID-19 still running rampant. Some people, and even countries, are still in hoard mode. We see moves to protect food supplies – even as milk gets dumped, chickens get culled and vegetables rot in the field. But the storable commodities could become high demand, with rice and wheat the most consumed grains in the world. 

Case in point, Egypt came into the market twice this week. On Tuesday, they bought 120 TMT Russian wheat at $240 FOB. Thursday saw them buy another 240 TMT – 180 TMT from France at $240 FOB and 60 TMT from Russia at $245 FOB. Russia raised their price $5/MT in two days, and Egypt still bought it.

US export sales last week were a solid 598 TMT old and new crop combined. China was the major buyer at 403 TMT hard red winter. US Crop conditions generally improved over last week, and yield prospects look good so far for both hard red and soft red winter. Moisture supplies in the northern plains are largely adequate, and spring wheat should get a solid start.

I’ve generally been bearish wheat coming out of the winter. But it’s tough to stay bearish when the potential bullishness is big, like if key rains don’t develop or if export lockdowns materialize. Seasonal tendencies, too, tend to push wheat higher into early May and I don’t want to stand in front of that, either. 

The three wheat markets have very different looking charts. KC is in the strongest position and I think the fundamentals support that. Longer term, I expect it will regain its premium over Chicago. That said, if Russia clamps down on exports or if their much-needed rains under-deliver, I could see Chicago move strongly higher as traders rush to buy wheat. Yes, Russia grows hard red winter, but Chicago is still the world’s benchmark. 

I look for wheat to likely get one more push up into the early May seasonal window, with highs often occurring around the May supply/demand report. This year the report is scheduled for May 12. By then, we will have a good look at our winter wheat crops and the rest of the Northern Hemisphere’s as well.

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