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European dryness could spark early wheat rally

Prices expected to recover in early July rather than later in the summer because of production problems in Russia and Ukraine

Expect milling wheat prices to rally earlier than normal this year and if that happens growers should seriously consider selling some new crop wheat, say analysts.

Prices typically fall through early summer and then start to rise in August or September. That was the case in 2017 and 2019.

Sergey Feofilov, director general of UkrAgroConsult, thinks this year will be similar to 2018 when prices rallied in July.

“This scenario of a wheat price recovery early in July is highly likely for 2020,” he said during a recent webinar organized by the Ukrainian agriculture consultancy firm.

He noted that spring conditions were unfavourable in the Black Sea region and the European Union in 2018, just like they were this year.

Feofilov thinks the market has been sluggish in its response to crop problems in the Black Sea area and EU but will come to its senses when the crop starts to come off the fields.

Dan Basse, president of Chicago-based AgResource Company, concurs with that assessment.

“We’re kind of in that same camp,” he said.

“We think the wheat market is either making the lows now or will do so in the next few weeks.”

He noted that the stocks-to-use ratio for the world’s top-seven exporters is at the lowest level since 2007.

Basse thinks Canadian farmers should keep a close eye on weather developments in Russia, Ukraine, Germany and France as the wheat crop enters the critical heading stage in the coming weeks.

“If any one of those countries has any hiccups in supply there will be a fairly dramatic market recovery,” he said.

His eyes will be on Russia in particular because he anticipates the government will be extra cautious about new crop exports after making a mistake with this year’s program.

“They let too much wheat out the door,” said Basse.

Flour prices are at record high levels in Russia and he suspects president Vladimir Putin won’t allow that to happen again in 2020-21.

Basse thinks Russian exports might be capped at 28 to 30 million tonnes versus the U.S. Department of Agriculture’s forecast of 35 million tonnes.

He is also watching reports of dry conditions in the European Union where much of the region experienced well below normal rainfall in the 90 days preceding May 18.

“If we do get a rally from our friends from Russia or the European Union it will be an opportunity late summer to make some sales,” said Basse.

He doesn’t think farmers should dilly-dally if that happens because the USDA is forecasting 24 million tonnes of Australian wheat production, up from 15.2 million tonnes last year. Those Australian supplies will be hitting the market in November/December.

“I don’t see a lasting bull market for wheat,” said Basse.

Feofilov said there is much uncertainty about Russia’s 2020-21 production. Trade estimates range from 73.7 to 81.2 million tonnes of production. The USDA is forecasting 77 million tonnes.

The Russian government recently dropped its 2019-20 total grain estimate to 120 million tonnes from 125 million tonnes. That works out to about a 75 million tonne wheat crop.

He said the wheat market is now a weather market and the weather hasn’t been good in southern Ukraine, where one-third to one-half of the region’s production will be lost.

Feofilov said about one million acres of production will succumb to drought in the south. But that is only 3.6 percent of Ukraine’s total area.

“It is quite far from a disaster,” he said.

However, some weather forecasters are predicting one of the hottest summers in history, which could damage Ukraine’s wheat crop during the critical ripening and kernel formation stage.

Much of the Black Sea region received rainfall in May. But he believes yields in Russia and Ukraine will still be lower than normal due to six months of drought leading up to the rainfall.

UkrAgroConsult is forecasting 78 million tonnes of Russian production, a 3.4 million tonne increase over last year and 25.9 million tonnes of Ukrainian output, a 2.4 million tonne drop.

Feofilov anticipates a slight increase in exports from the Black Sea region to 53.6 million tonnes, up from 52.9 million tonnes in 2019-20.

He is forecasting a drop in EU production. Soft wheat areas in France and Germany are at or near record lows due to poor rainfall at sowing time.

Feofilov expects EU wheat exports to fall to 29.2 million tonnes from 33.5 million tonnes. The USDA is forecasting a more dramatic decline to 28.5 million tonnes from 35 million tonnes. The USDA’s numbers include the United Kingdom.

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