Pressing Pause on Weather Premiums
Wheat markets continue to be pressured by the accelerating winter wheat harvest in the northern hemisphere, but spring wheat futures and durum cash prices have been resilient as dryness concerns in Western Canada and the Northern Plains grow.
The U.S. Drought monitor has noted that abnormal dryness is settling in across many areas, including the western Cornbelt and pockets of western South Dakota, central North Dakota, and eastern Montana. Those dry conditions have stretched up into southern parts of Western Canada, but there are some rains that have fallen or are forecasted to fall before the end of the month. If we see some better moisture, we should expect the resilience in HRS wheat and durum to start to retract.
The other factor that’s helping Canadian cash wheat prices though has been strong movement, as with limited demand for other commodities, railroads are wide open to finally ship grain without restriction. For Canadian non-durum wheat exports, we’re now just 6.5% behind last year’s pace with nearly 15 MMT sailed. Worth noting is the year-over-year comparison of weekly shipments in the chart below and how much better we’re moving product right now.
Looking elsewhere, The Australian Bureau of Agriculture and Resource Economics (ABARES) increased the country’s 2020/21 wheat production estimate to 26.1 MMT, 13% more than the 10-year average, if realized, as beneficial moisture through the planting season pulled the country out of a three-year drought. ABARES forecasts total Australian wheat exports will reach 16.5 MMT in 2020/21, up 79% on year, if realized.
In Europe, persistent dryness continues to reduce the grain production forecasts there. The latest downgrade came in Germany, as the farm co-op association there lowered its estimate to 22.2 MMT, which would be a 4% drop year-over-year. Nearby, the Russian government shared this past week that their wheat exports will be quota-free until at least December but quotas will be likely introduced for the second half of the crop year (January to June 2021). The restrictions are meant to allow for the domestic market to have enough wheat and not see food prices increase (read: food inflation).
What this basically translates to is Russia will oversupply the world with wheat for the next 4-5 months, with the usual destinations being Asian and Middle Eastern markets. Thereafter, Australia will probably help fill a few demand holes, and then we’ll see the seasonal hand-to-mouth buying that Asian millers have reverted to these last few years.
Overall, while traders are watching the dry conditions in some areas, most are cognizant of healthy rains falling in other regions, plus the supplies carrying over into the new 2020/21 crop year. Accordingly, we’re starting to see the spread between old and new crop pricing for all wheat types starting to diverge. More specifically, new crop durum prices are slowly climbing to old crop levels, while new crop CPS prices are falling back, for both new and old crop. HRS wheat prices continue to trade sideways, but with any moisture events, expect these values to retreat, which is in line with their usual seasonal tendencies.
CEO | FarmLead
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