Wheat Markets Fall Flat with Oil, Equities
Wheat markets hit fresh multi-month lows to start the second week of trading in March, as agricultural commodities fell hard alongside oil and broader markets. The rout on oil prices started on Friday as Russia and OPEC failed to agree on how much to reduce their combined oil production by, leaving the relationship between two countries now embroiled. While wheat prices are obviously down notably, oil prices have lost nearly 50% since the beginning of 2020 (you might want to consider locking in some fuel for the next year or two!).
The big news hitting wheat markets was the bearish forecast from ABARES for Australian wheat production for the 2020/21 crop year. The USDA equivalent in the Land Down Undaa said last week that they’re expecting Australian farmers to increase acres seeded into wheat by nearly 20% from last year to 29.7M. Combined with the thinking that Australia should get more in the coming months, they are estimating that 2020/21 Australian wheat production will hit 21.3 MMT and exports should total 8.2 MMT. These would be a 40% and 51% jump from the most recent estimates, which were updated just a few weeks ago. There’s a clear moisture deficit in Australia and while wheat is a weed and can grow in some pretty tough conditions, I and almost every other wheat market participant out there view a 40% jump in production as quite a stretch (same with exports).
In the U.S. winter wheat conditions are improving with Kansas at 43% good-to-excellent (+8 points from last week), Oklahoma at 57% G/E (+11), and Texas at 36% G/E (+5). Conversely, in France, some unusually warm, wet weather is putting a damper on the soft wheat crop conditions, now rated at 65% good-to-excellent, down 20 points from the same week a year ago. For the French durum crop, Plant 2020 is nearly complete, but crop ratings are sitting only around 67% G/E. That said, we’ve seen a subtle boost in Canadian durum prices in the past week, but as trading activity has indicated to us these past few weeks, the durum market is operating very hand-to-mouth. Therefore, these elevated opportunities might be short-lived.
Looking again at the 2020/21 crop year, in the Black Sea, the governments of Russia and Ukraine recently updated their forecast for their wheat 2020 harvests to 72 MMT and 23 MMT, respectively. For Russia, this would be the second-largest crop ever (record was 85.2 MMT in 2017/18), while Ukraine’s would be a drop of about 17% from their record haul last year of 29 MMT.
Ultimately, we know that there’ll be more wheat in the world (assuming Mother Nature keeps close to her sunshine and precipitation averages). However, the known unknowns are that we don’t know what demand might look like amidst a record production year. My guess is that we’re probably close to a bottom in oil prices (and the bottom in grain markets isn’t likely far behind) as the last few times we’ve been at these levels (2009 and 2016), the market rebounded throughout the remainder of the calendar year.
The obvious difference between those decline and subsequent rebounds in oil prices and today is that we don’t know the true lasting economic impact of coronavirus. Will more of the world be quarantined? My guess is yes, especially in emerging/developing countries in Asia and Africa where healthcare systems are weak and the spread of the coronavirus is more likely. The problem is, if you’re a net-exporter, these are the trading partners you were previously hoping to see more demand from, not less.
President & CEO | FarmLead.com