Weather can determine how successful a growing season is, as well as the direction it moves prices. Geopolitical issues take a more indirect route to impacting markets and prices, but they are often effective in doing so with added volatility. Lately, a combination of both is helping to support wheat prices, at least more so than in recent months.
“In the wheat market, there’s a little bit of positive news for prices. We are starting to get a little weather concern to come in to support the market domestically. And then internationally, a little risk premium is being put in with some of the heightened geopolitical tensions taking place around the world,” said Jim Peterson, market director for the North Dakota Wheat Commission.
Peterson noted that as the end of April approached, there were some concerns growing in parts of the winter wheat region with some above normal temperatures forecast and optimism on moisture for the driest areas fading.
“But the follow through with the weather patterns hasn’t been as much as some of the optimism. In some places it’s probably starting to get critically dry, and with the above normal temps, crop maturity is being advanced a bit. That’s starting to be a concern that’s maybe taking some of the top end off the yield potential,” he explained.
Looking at the current ratings of the U.S. hard red winter wheat crop, ratings are higher overall than they were a year ago at this time. In fact, Peterson noted, much higher, as about 55 percent of the crop was still rated in good-to-excellent condition, and 13 percent of this year's crop was rated in poor-to-very poor condition as of mid-April. That compares to last year when only 27 percent was rated good-to-excellent, and 40 percent was rated poor-to-very poor.
“There’s no question the crop is still in better condition, but we do have less planted acres (this year),” he said.
Kansas is a big winter wheat state to watch, and they’ve been missing out on more of the precipitation than other states. Only about 43 percent of the Kansas crop is rated good-to-excellent, and 20 percent is already rated poor-to-very poor.
“If they continue to miss out on the rain, it will continue to add into the market,” he said.
A couple other states to watch are Texas and Washington, both bigger producing states, where the crop ratings aren't quite as positive. That said, much of the rest of the country, as of April 22, was “sitting okay.” Farther north, the wheat crop is later maturing, but it will definitely need more moisture as temperatures warm up, he noted.
As far as maturity of the crop, 11 percent has headed, which is a little ahead of the 7 percent that is typical for this time of year.
For the spring wheat region, there’s both a positive and negative for prices.
“On the positive note, it looks like an earlier planting season than a lot of other areas relative to the last few years, so that’s typically yield positive,” he explained. “The reason we’re seeing earlier planting is a lot of areas are abnormally dry to critically dry. If we don’t get a big shift in weather patterns here, we could see some early season moisture stress on the spring wheat region.
“Then we’ll see what happens with acres. Right now, the forecast is for unchanged total acres nationally, maybe up slightly,” he added.
On the international front, Peterson pointed out that, in the short run, there are still plentiful stocks that keep prices under pressure. A couple of areas to watch include the Black Sea region and in the Middle East with the situation between Iran and Israel.
“In the Black Sea region, we’re starting to hear more of Russian execution problems on the contracts, just with the dispute with exporters and government authorities over phytosanitary issues and contract specifications,” he said.
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“With the Iran/Israeli conflict uncertainty, and probably more heightened tensions, I think we’re starting to see some risk premium come into some of the other commodities like oil. Some are speculating that wheat and other grains may need to build in some risk premium too if those tensions continue,” he continued.
“Also the Russian crop, while it still looks large, it’s probably not as robust as recent years, so that could potentially take some of the pressure off of the EU (European Union), which has really struggled to export in the last year or so to North Africa and the Middle East region, which has been dominated by Black Sea wheat. So that, in turn, puts pressure on EU prices and maybe that will shift a bit,” he added.
Yet another on the international scene is India, where their ending stocks are the lowest since 2007.
“While they have a good crop in the making, the government forecast is for about 112 million metric tons, which is a pretty large crop, but a lot of private analysts and millers think it may be as low as 105 million metric tons, so quite a discrepancy,” he said. “I guess we’ll find out once they get through harvest if they’re going to need to import, and if they do, that would certainly be a catalyst for higher prices.”
The last big thing, he pointed out, is the amount of funds that are short the Chicago futures.
“At some point, if they decide to shift their position and start buying out, that would be supportive to futures too,” he said. “Those are some of the bigger mega issues that are impacting markets.”
Pricewise, he noted that prices have still been holding in a 50-cent trading range where they’ve been in since the first of the year. Minneapolis July has been holding in that $6.30-$6.80 range and has been getting a little support with dryness now. Cash prices are in the $5.90-$6.40 range with an average of $6.20. Again, those have been pretty stable over the last couple months.
Fundamentally, Peterson said spring wheat still has some very good positives. Exports as of mid-April were 13 percent ahead of a year ago at 234 million bushels (MB) in sales. That’s stronger than the 7 percent increase USDA’s projected 230 MB target.
“The big thing will be that we shipped 200 MB of that 234 MB, so we need to get the rest shipped by the end of May to reach USDA’s goal,” he said.
Top U.S. markets have been the Philippines and Mexico, which account for 100 MB combined, or about 43 percent of U.S. demand. The other eight markets in the top ten account for 45 percent of demand.
“The U.S. is heavy loaded to the traditional markets, and with our premium in the world market that’s to be expected. But it’s been very positive,” he said. “We’re running higher year on year in most markets, and starting to capture some new crop sales, which is positive.”
Overall U.S. wheat exports are still 2 percent ahead for the year with 690 MB vs. 680 MB a year ago. USDA is forecasting a 6 percent decline. Spring wheat and soft red winter are helping in that improved pace.
But, obviously, Canada provides a lot of competition to the U.S. on the spring wheat side. Their export sales as of mid-April were at 460 MB. That compares to 420 MB a year ago.
“They were projected to have steady-to-lower exports, so they’ve been able to capture more demand,” he said.
Canada’s big markets are China and Indonesia, followed by Japan and the EU, so that’s a little different than where the U.S.’s strong exports have been. For example, Canada’s exports to Mexico are only 16 MB, so only about a third of U.S. sales to Mexico.
He also noted there are more shipments coming from Canada into the U.S. to some eastern mills, and imports into the U.S. are running about double what they were a year ago at about 20 MB.
“With that said, there are some good fundamentals under the spring wheat market, it’s just we’re still vulnerable to the geopolitical volatility in the market, and no one knows where those issues are going to go, or how accurate weather predictions will be, so the market will continue to be impacted by those,” he said. “But I think there are some building positives, which will hopefully take us out of this trading range that we’ve been in here for a few months.”