Market Insider

Another Year of Musical Chairs?

Wheat markets closed lower last week as a Friday sell-off pushed the performance into the red. Pressuring wheat prices has been the start of the harvest in the Southern Plains, Europe, and the Black Sea. Some new production forecasts out of Australia are also keeping the bears in charge.

Canadian wheat exports continue to improve with another 450,000 MT sailed last week, for a total of 14.1 MMT (still down about 7.5% year-over-year). However, Canadian wheat exports have been quite strong as 3 out of the last 4 weeks have been some of the largest weekly sailings for the entire crop year. The reasons for the uptick in Canadian wheat exports have been restrictions by other countries, a weaker Canadian Loonie, and above-average demand due to COVID-19. Also, there’s less movement on rail of other goods (i.e. oil) and there’s no protests impeding railroad traffic in Canada (not the case a few months ago), which has allowed railroads to move record levels of grain. Of note, Canadian grain exports through Thunder Bay are up 30% year-over-year.

Looking elsewhere, through the last week of May, Russia had shipped out 31.6 MMT in the 2019/20 crop year. Considering that their Ag Ministry stated that they had done 31 MMT of wheat exports through the end of April, this means that just 600,000 MT of wheat sailed from Russian ports in May. It may seem incredible on paper, but this is what happens when countries put limits on exports.

The main reason behind the wheat exports limits is that domestic wheat prices in Russia are sitting near record highs, but due to currency factors, Russian wheat is still one of the cheapest sources in the international market. That said, wheat prices in Russia stabilized for a bit but have started to increase again as concerns over the size of this year’s wheat harvest are omnipresent thanks to Interfax estimating production could fall by as much as 40% in the important southern region of Stavropol. From my perspective, the yield losses are being a bit sensationalized and Russia’s wheat harvest will still be pretty decent, we could see Russian again implement restrictions on its wheat exports later in the crop year.

Going forward, we know that Ukrainian and European Union wheat harvests are going to smaller, although they are getting some good rains late in the growing season. Regardless, it’s expected that wheat exports from these two major players will be much less in 2020/21 than they were in 2019/20. For example, Ukraine’s wheat exports are supposed to total 20.5 MMT but it’s expected to drop down to just 14.9 MMT in 2020/21. From my vantage point, given the smaller wheat harvest, there’s a pretty high chance that we could see Ukraine put restrictions on its wheat exports again in 2020/21.

One country whose wheat exports are likely to start improving is Australia, as good rains and expanded acreage is setting things up for a big crop and export campaign. Rabobank is currently estimating that the Australian wheat harvest will be 22.5 MMT but with further good weather, it could top 26 MMT. Further, Rabobank is pegging Australian 2020/21 wheat exports at 17.5 MMT, which, if realized this would be more than double the volume of 2019/20 Australian wheat exports.

Lending support to this idea is that spreads between old crop and new crop wheat prices in Australia are starting to narrow. Also playing a factor is weaker demand from the livestock sector as the good rains have improved pasture conditions, thus reducing the need for feed grains like wheat. Any similar weather in the Canadian Prairies will intuitively have the same effect. The good news is that the aforementioned extra demand should offset some of these bearish undertones on the supply side of the balance sheet.

To growth,

Brennan Turner

CEO | FarmLead
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