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Comment: Wheat market looks beyond record stocks

U.S. and Russian crop woes are causing wheat prices to rally despite expected stockpiles

Reuters – Chicago-traded wheat futures have rallied to near six-year highs on strong global demand and unfavourable planting conditions in some major exporters, despite the expectation for record-large stockpiles by mid-2021.

Most active CBOT wheat hit US$6.38-1/4 per bushel on Oct. 20, the contract’s highest since Dec. 24, 2014. That is consistent with rising international prices, particularly in top supplier Russia, where wheat prices hit record levels last week amid the weak currency and high export costs.

Dry soils are threatening next year’s wheat harvests in Russia and the United States, which together account for a little more than a third of global exports. The short-term forecast remains dry for the top Russian wheat region, and key U.S. states could be facing extended dryness under La Niña conditions.

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But despite these very legitimate harvest worries, the global wheat market in recent years has done a remarkable job of balancing supply-and-demand levels, even when some countries occasionally come up well short of production targets.

Wheat currently being sown in the Northern Hemisphere will be harvested in the 2021-22 cycle that does not start until later next year. But a supply cushion has been built up in the current year, as U.S. government outlooks show world ending stocks rising to an all-time high in 2020-21.

That is expected to be true with or without China, which historically participates to a minimal extent in wheat trade. But China’s wheat hoard continues to expand following a record harvest earlier this year.

China is set to have 51 per cent of the world’s wheat in storage by mid-2021, and its domestic stocks to use is seen rising to a new high of 125 per cent, meaning it will have about 15 months’ worth of wheat needs in storage.

When excluding China, USDA projections show world wheat stocks to use at 19.5 per cent in 2020-21. That ratio, a measure of supply versus demand, has been steady over the last decade despite larger swings in production. It has not fallen below 18.2 per cent and has not risen above 20 per cent in the last 10 years.

Official outlooks for 2021-22 have yet to be released.

Russia has largely outgrown its reputation for being a “swing” production region, meaning that ample output has become increasingly reliable in recent years. But the global wheat market still takes seriously any threats to the heavily exported crop.

At the end of September, soils in the Southern District were the driest for the time of year since 2015 and 28 per cent lighter than in the previous four years. The region is Russia’s top winter wheat producer, accounting for more than 40 per cent.

Forecasts at press time suggested that this month will likely become one of the driest Octobers on record in the Southern District. Some analysts believe that Russian farmers may still sow a record wheat area this autumn, but others recently said it could fall up to 15 per cent.

Soils were even drier now than during sowing in 2013 and 2014 for the 2014-15 and 2015-16 harvests, but the spring and summer weather made a difference in those outcomes. Neither of those wheat crops were a disaster, but the 2015-16 harvest could have been one without the strong surge in plantings.

Planting progress should be closely monitored because a smaller area will limit harvest potential, leaving no room for weather errors later in the growing season. Poor-yielding wheat crops, like the one in 2015-16, had too little rainfall in the spring combined with hot temperatures into the summer.

The global wheat market reacts less intensely to weather problems in the United States than it does the Black Sea since a greater portion of U.S. wheat is destined for storage, but the status of the Southern Plains is becoming severe.

Kansas produces about a quarter of the U.S. winter wheat crop, and it may be on pace to notch its driest planting period in 126 years on record. So far, August-October rainfall is at only 41 per cent of the normal amount. Soils in the state are the driest for the time of year since 2012.

The presence of La Niña, the cool phase of the equatorial Pacific Ocean, could make things even worse for Kansas and its neighbours. That pattern, which will likely last into early 2021, often reduces winter precipitation across the Southern U.S. Plains.

The last La Niña event in 2017-18 created one of the driest growing seasons in history for winter wheat in Kansas, resulting in terrible yields. The drought also held back the state’s 2018 corn and soybean harvests.

Kansas is not the only parched U.S. wheat area, as parts of soft red winter wheat country, including Illinois and Indiana, are notably dry. Colorado, which also produces hard red winter wheat like Kansas, is amid one of its worst droughts on record.

As of Oct. 18, some 77 per cent of U.S. winter wheat acres were planted, ahead of the five-year average for the date of 72 per cent. Emergence was at 51 per cent versus 48 per cent average.

Karen Braun is a Reuters market analyst. The views expressed here are her own.

About the author

Columnist/Reuters

Karen Braun is a Reuters market analyst based in Chicago. The views in this column are her own.

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