Wheat dependent on U.S. weather, Black Sea risk

Ahead of the February long weekend, the wheat complex surged higher towards the end of the week, but on Friday, at the end of the trading session, wheat markets pulled back thanks to some heavy profittaking in Chicago SRW wheat. Had it not been for this bearish trade, the March contract would’ve likely ended the week about 15¢ USD/bushel higher than its actual close. Corn and soybean traders continue to watch yield and production reports out of South America, and this helps wheat a little bit. However, a Ukrainian-Russian war remains on everyone’s minds, especially with some fishy activities going on that could spark increased military activity (i.e. multiple explosions in the eastern Ukrainian city of Donestsk, which is technically controlled by Russian-backed separatists).

While the geopolitical risk in the Black Sea is quite volatile, as you’ve read in this column a few times previously, I continue to be mindful of the drought situation in the U.S. winter wheat belt of the Southern Plains, and even up into the Northern Plains. Most of Montana, Oklahoma, and Texas are in a state of extreme or exceptional drought, while the rest of the region (from the Dakotas down to Kansas) are all in severe or moderate drought. Put simply, winter wheat crops will be emerging from dormancy in the coming days and weeks, and while there’s time for rains to jumpstart the crop, it needs to happen soon.

To cement this moisture need, this past week, the NOAA released its outlook for U.S. temperature and precipitation over the next 3 months (March, April, & May). As you can clearly tell in the maps below, not only is the U.S. Southern Plains expected to receive below-average rain, temperatures are also expected to be elevated. The USDA will start publishing crop progress reports on April 4, 2022, and if rains don’t materialize in the next 6 weeks, the first printed numbers are likely to be bullish. That said, wheat is a weed and even a little rain can help make a difference!

Heading north, earlier this month, Statistics Canada released its estimates of grain inventories at the end of December 2021, and as many would expect, supplies are a lot smaller than a year ago. Total wheat stocks were pegged at 15.6 MMT, down about 38% year-over-year. This adds up as, with the Canadian wheat output (including durum) down about 30% yearover-year, and producer deliveries down by 26% to 10.7 MMT trucked in. This basically means that, despite the smaller harvest, farmers are delivering proportionately more grain than the same time in 2020. I would posit that higher prices are principally behind this activity.

Finally, last week, Agriculture Canada updated its supply and demand tables for Canadian crops. For durum, old crop domestic use was lowered by about 50,000 MT, thereby increasing ending stocks by the same amount to now sit at 500,000 MT. This would be the smallest carryout since 1984/85’s 498,600 MT. For 2022/23 new crop, AAFC also dropped domestic use, but by 100,000 MT. Combined with the extra 50,000 MT in old crop carryover, 2022/23 Canadian durum ending stocks are now forecasted at 900,000 MT, which is still about 160,000 MT or 15% below the five-year average. As I’ve previously mentioned in this column, I’m looking at crop years 2002/03 and 2008/09 as a few comparables to how the 2022/23 season may play out, as both of those years followed a drought.

For non-durum wheat, AAFC has started to recognize the slow pace of exports and lowered their full-year 2021/22 forecast by 1 MMT to now sit at 13 MMT. On the flipside, 2021/22 old crop domestic use was raised by 460,000 MT, which levels out to ending stocks now sitting at 3.5 MMT. This is still pretty tight and a record low, but is coming close to 2007/08’s 3.56

MMT carryout (there is that comparable again!). For the new crop 2022/23 year, domestic use was raised by 250,000 MT, so combined with the extra old-crop carryover, new crop ending stocks are now pegged at 4.25 MMT.