By John DePutter & Dave Milne – February 24, 2021
“A prolonged cold snap in the Great Plains region of the United States may have caused serious damage to the winter wheat crop.”Western Producer, February 22, 2021
What it means:
In the immediate term, possible freeze damage to the US winter wheat crop remains largely unknown. It’s a market factor, but not a known factor.
What’s just as important is this: It remains overly dry in the main Hard Red Winter production state of Kansas – as well as Oklahoma, Colorado and Texas. Spring moisture will still play a bigger role in final production.
So, what the US weather threats really bring into focus for now is the upside potential for wheat. Will wheat get on its horse and follow corn and soybeans?
As all farmers know, corn and soybean futures have already breached multi-year highs. The May corn contract has pushed up past US$5.50/bu and traded recently at its highest since 2013. May soybeans are trading above US$14 and the highest since 2014. But while wheat has also hit multi-year highs, it has not rallied nearly as sharply as its corn and soybean counterparts.
Indeed, the May corn and soybean futures have both gained over 50% over the past six months. In contrast, over the same period, the May contract of the benchmark Chicago wheat market has added less than half of that. Given the relatively tepid gains for wheat compared to corn and soybeans, it raises the possibility that perhaps wheat is just waiting for the right trigger to explode higher.
Global supplies are heavy, but …
One factor holding wheat down is a huge global supply. In its February supply-demand update, the USDA pegged 2021-22 world wheat production and ending stocks at 773.4 million and 304.2 million tonnes, respectively. Those are both new record highs.
However, it bears repeating that over half of the world’s wheat ending stocks are in China and therefore not generally available to the world market. India is projected to hold about 9% of the stocks and is also not typically a significant wheat exporter.
On the other hand, combined stocks in the primary exporting nations, including Canada and the US, are tightening rather than building. In fact, wheat ending stocks held by the world’s top eight exporting countries are projected at just 60 million tonnes for 2020-21. If accurate, that will be the lowest since 2013-14.
Bottom line: There is lots of wheat in the world, but the supply that’s readily available to international buyers is shrinking.
Russian wheat tariffs
Another potentially bullish factor for wheat is Russia’s efforts to keep more of its domestic supply at home. In December, the Russian government announced temporary trade restrictions for certain grains and oilseeds. This news came despite record 2020 production. Russia also plans to introduce a permanent floating rate tax on wheat exports (starting June 2) that will be triggered when market prices move high enough.
Russia’s moves are aimed at helping to control domestic food prices, but the larger implication is clear – there will be less wheat available to the world market and potentially place a greater burden on other exporting nations to make up any supply shortfalls.
Of interest to Hard Red Spring wheat growers, the new tax could also limit Russian spring wheat acres this year. Farmers may be more inclined to grow crops which do not face export taxes and limits.
Meanwhile, seemingly protectionist measures have also been enacted in Ukraine.
And how about China? That country has been a strong buyer of many commodities in 2020-21 and wheat is no exception. As soaring corn prices encourage livestock and poultry farmers to switch to using more wheat for animal feed instead of corn, China’s purchases of US Hard Red Winter wheat are at record levels.
In its February supply-demand update, the USDA raised its forecast for China’s wheat imports for the current year from all sources by 1 million tonnes from January, to 10 million. That would be almost double the previous year.
New-crop yields will be stretched to meet target
Looking ahead to the 2021 US wheat crop, USDA analysts penciled in an all-wheat average yield of 49.1 bu/acre, down a mere 1% from a year earlier.
Considering the likelihood of continued drought on the US southern Plains, along with the possibility of cold weather damage, a 1% drop in the average yield at this point might seem optimistic. And don’t forget that large portions of the US northern Plains, where the spring wheat crop is grown, is also in drought. It’s not a long shot to think that below average spring wheat yields could pull down the average.
Even using the USDA’s yield estimate, US new-crop wheat ending stocks are nevertheless forecast to decline 17% on the year, to 698 million bu, the lowest since 2013-14.
The 2021 US winter wheat crop still has a long way to go and, depending on the weather, it is still entirely possible it will be a bin buster. If corn and soybeans markets turn south, wheat could follow, even though it did not go nearly as far on its bullish journey.
On the other hand, given the strength of demand and such factors as protectionism, along with supply drawdown in exporting nations, one can expect the wheat market to be hyper-sensitive to the weather as the US winter wheat begins coming out of dormancy in the next few weeks. If weather problems become a certainty, it is possible wheat will make up for lost time, tracking the upward journeys of corn and soybeans.
Lots of wheat growers across Canada will be anxiously watching the market. As the second-largest acreage crop in western Canada after canola, and the crop with the third-largest acreage in Ontario, a lot farmers will celebrate if wheat joins the party, and be disappointed if it does not.
The DePutter services are monitoring the market for signs and signals. We’ll be commenting on it and offering marketing advisories in our newsletters.
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