Wheat has been considered the weak man of the major crops for a couple of years because of ample supply, but that is rapidly changing.
Those who trade the three American wheat contracts were jolted by the excessive rain in the Midwest last week. The major traders have research arms that are aware of the dry weather in Western Canada, but that’s not making the headlines of the big markets news services just yet.
However, the concern level is rising and with the wheat contract still heavily net short, it was primed for a sharp rally, just as it was earlier this spring when excessive rain in the southern U.S. Plains hit the hard red winter wheat crop, causing quality problems and delaying the harvest.
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As this column was written June 29, the Chicago soft wheat contract had risen 20 percent since the open June 1.
Minneapolis spring wheat futures had risen only 14 percent in the same period because the American hard red spring wheat crop is in great condition.
The wheat rally in May stalled out because the rain stopped in the southern U.S. Plains, the combines started rolling and production in other world regions still looked promising.
However, this latest rally should have better staying power because I think several cropping issues around the world are going to lead to smaller than originally expected crops and smaller year end stocks.
The current official forecast of Canada’s wheat and durum crop is 29.7 million tonnes, similar to last year. Given the rain deficit in much of Alberta and Saskatchewan, that is not going to happen. Let’s say prairie production drops 20 percent, or about six million tonnes.
Australia saw good rain in western and eastern growing regions in the week ending June 23, but the National Australia Bank Ltd. last week forecast that the wheat harvest there could fall to 20 million tonnes or less under a classic El Nino pattern that leads to dry weather in the country. It would be six million tonnes less than the current USDA forecast.
Dry weather in France and Germany is trimming what was expected to be a strong crop. Record high temperatures of 30 C to 40 C are blanketing France and Germany this week. Let’s be cautious and say the EU wheat shrinks only about two percent, or a reduction of three million tonnes.
Adding those up, that is a reduction in the global crop of 15 million tonnes.
Assuming no change in demand, that would knock global year end stocks to 187 million tonnes, down from the current forecast of 202 million.
It would put the global stocks-to-use ratio down to about where it was in 2012-13 and 2013-14, when prices were substantially better than they are now.
As this column was written, Chicago old crop wheat was taking a run at US$6 a bushel but was often trading around $7 in 2013-14 and traded between $8.50 and $9.50 the first half of 2012-13.
Looking down the road, there is potential for more global crop problems.
It’s expected to be wetter than normal in the Midwest this summer. If the type of heavy rain that we saw recently continues, it could lead to problems in corn and soybeans, hitch would add more support to prices for those crops.
The El Nino does not appear to be slamming crops in Asia yet, but there is the potential. Much of Australia was dry until the latest rain.
China’s winter wheat harvest is looking good, but the main corn and soybean growing region, which is in the north of the country, looks dry, and El Nino tends to cause dry conditions in the north and excessive rain in the south.
The market outlook is starting to appear much more bullish than it was just a few weeks ago.
