The News & What it Means – Some Truth in the Potential for Lower Wheat Prices but Weather Questions Remain

By John DePutter & Dave Milne – December 11, 2018


The news:

“While most crop markets had a lackluster 2018, wheat enjoyed a rally. But those gains look like they may be fleeting.”



What it means:

The story has some truth to it.


It caught the eyes of the DePutter team because we’ve been thinking about the very same storyline. After more than two years trending higher on the major benchmark US markets, could wheat be setting up for a cycle high followed by a two-year downtrend?


Certainly, the Bloomberg story, which notes that Rabobank International ranked wheat as the most bearish crop for the year ahead, makes a compelling case in terms of why wheat prices may falter in the new-crop marketing year that starts next summer – the fact the world’s farmers are likely to devote more acres to wheat being one of the main pieces of evidence.


As mentioned in the story, wheat prices are heading for a 23% gain in 2018, the top performer among the 11 agricultural commodities in the Bloomberg Commodity Index. And beside the relatively weak performances of corn and especially soybeans, it’s a good bet farmers around the world will respond to the relatively strong prices by planting more.


But lower prices are by no means a sure thing. At this early stage, it’s a mug’s game to try and predict how markets may shake out in 2019-20.


For one thing, weather will have some say in the outcome.


It has already spoken out: Unusually wet conditions in key US winter wheat growing areas meant thousands of acres originally intended for wheat didn’t get seeded.


And Mother Nature will have plenty more to say about whether the acres that did get planted will in fact turn into heavier production. This stands not just for the US but elsewhere around the world too.


Really, we don’t need to look much farther than the 2018 growing season to see how things can go off the rails. In fact, it was largely weather-related reasons that sparked the gains we’ve seen in wheat this year. In Russia, drought reduced the 2018-19 wheat crop to just 70 million tonnes from almost 85 million a year earlier. Similarly, overly dry weather cut the EU wheat crop to 124.5 million tonnes from 151.2 million, while Australian output declined to 17.5 million tonnes from 21.3 million.


Those losses helped push world production to its first year-over-year decline since 2012-13, as seen on the graph here.



Who’s to say something similar can’t or won’t happen again?


In the US, the often-erratic conditions on the southern Plains are likely to offer up weather scares over the next few months. Closer to home, parts of the Canadian Prairies continue to have lower than normal soil moisture.


El Nino likely

Meanwhile, an El Nino event seems likely to develop through the Northern Hemisphere’s winter and potentially last through spring. El Nino events typically don’t have a massive impact on global wheat production one way or the other. Still, its effects on the individual countries and the global market can be significant – and it bears watching.


It boils down to this:

The wheels are turning for more world wheat production in 2019, bringing lower prices. The key question is, what will the weather do?


If you’re interested in monitoring the progress of wheat crops around the world, and the market’s response, contact us. If you’re wondering how to prepare for the possibility of more production and lower prices later in 2019 and 2020, we might be able to help.


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