Most of this week was spent correcting the major rally during March.After about a 50% correction, the markets seemed to catch, and managed a strong day on Friday. Much of the enthusiasm that propelled wheat higher – flour mills running non-stop, tight supplies of spot wheat and general panic buying – has waned.
However, there is one bullish factor that hasn’t waned, and that is the developing dryness across the Black Sea. Over the last month or so, rain has been almost non-existent across eastern Europe, Ukraine and western Russia. After a planting season last fall that had good growing conditions, followed by a very mild winter, the broader Black Sea region has quickly transformed into a concerning dry area.
If the dryness continues, it becomes a significant bullish component of the wheat complex, and even though Russia grows hard red winter wheat, the rally will likely be led by Chicago because that is where large traders like to be. So we need to be watchful of the Chicago/Kansas City spreads. That said, if the rains come to the region then the market will likely resume its bearish trajectory into harvest, led by Chicago.
Here in the U.S., production prospects look very good, even with record low plantings. Still, early estimates for 2020/21 ending stocks are projected to be lower than this year. I would argue, too, that usage is probably increasing with millions of school kids at home likely eating way more sandwiches than normal. Is it enough to propel wheat higher without a weather event? Likely not. The US does not have a shortage of wheat. Nor does the rest of the world.
But some countries are becoming tight fisted with wheat supplies. This week, Russia announced export quotas for all grain at 7 MMT for the rest of the marketing year, which ends June 30. They were not expected to export more than that anyway, but it is a way for them to get procedures in place in case they need to move quickly. The government will also release 1.5 MMT of wheat into the domestic market to relieve high bread prices. The ruble’s collapse has made their exports very cheap and the government is concerned about tight supplies if weather stays dry.
Russia’s export pace had already picked up significantly recently, with March wheat exports reportedly 3.3 MMT. April export projections are higher yet. Russia sets world price, and if prices make a run there, the rest of the world will follow.
Brazil is shopping wheat, with mills requesting the government to remove the 10% tariff on non-Mercosur countries. They also have their eye on Russian wheat, likely due to price, and are asking their government for phytosanitary exclusions on Russian wheat to make it easier to import.
US export sales last week were a very low 257 TMT, a big disappointment following last week’s 1.1 MMT. We saw a number of cancellations, never a good sign. China did buy 60 TMT of hard red winter.
Crop condition ratings were mixed this week. Kansas and Texas saw improvements while Colorado and Oklahoma saw declines.
This week also had the spring prospective plantings and quarterly stocks reports. Wheat did have some bullish surprises, but it wasn’t enough to support the market. All wheat plantings were 44.7 million acres, down 500,000 from last year and the lowest since records began. Winter wheat was pegged at 30.8 million acres, down 400,000 from last year and the second lowest on record. Spring wheat came in at 12.6 million, down 100,000 from last year; durum acres were estimated at 1.29 million, down 50,000 from last year.
It looks like Montana is swapping 400,000 acres of winter wheat for spring wheat, which takes winter wheat acres down to 1.6 million, and spring wheat up to 3.3 million. Kansas is projected to see wheat acres down 100,000 from last year to 6.8 million. Corn acres were pegged at 97.0 million, up 7.29 million over last years rain plagued season; soybeans were pegged at 83.5 million, up 7.4 million.
The stocks report showed wheat supplies as of March 1 at 1.41 billion bushels, down 180 million from last year, a drop of 11%. Corn stocks were pegged at 7.85 billion bushels, down 660 million from last year and a drop of 8%; soybeans were 2.25 billion bushels, down 470 million from last year, a 17% drop.
Going forward, I look for wheat to find support on this 50% break, as it waits for Black Sea weather developments. If it stays dry, the fundamental picture changes dramatically for wheat and I would expect a strong rally. If the rains come, I expect wheat will continue to work lower into the summer months.