Wheat market dismisses war, crop risks despite still-thin stocks -Braun

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NAPERVILLE — Supply risks are not over for global wheat, but Chicago wheat futures have recently traded as though they are, with prices falling well below year-ago levels and investors building big shorts.

Most-active CBOT wheat bottomed out at $7.05-3/4 per bushel on Monday, the contract’s lowest level since Sept. 30, 2021. That was five months before the invasion that shut off Ukrainian exports but a bit before wheat traders’ concerns over Russia-Ukraine tensions began intensifying.

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Although prices remain historically elevated, they are fast approaching a $6-handle, which was last seen for the most-active contract in September 2021. However, front-month March wheat descended and settled below $7 per bushel on Monday.

Monday’s most-active settle of $7.10 per bushel is 11% off the month’s high and is completely divergent to the year-ago trend, when wheat surged following the Ukraine invasion. Wheat topped $13 in early March 2022 and averaged over $11 per bushel that month.

When it comes to further selling pressure, lighter trading volumes and/or open interest can sometimes inflate futures price swings, though speculators are already heavily bearish.

By January’s end, money managers’ net short position in CBOT wheat futures and options was near four-year highs, impressive given 14-year lows in open interest. Funds’ recent wheat net short is comparable with those held during the ultra-bearish stretch between 2016 and 2018 when considering the differences in open interest.

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The possibility for a one-year extension of the Ukraine grain deal, which will expire next month without action, and China’s call for peace in Ukraine have accelerated negative price sentiment for wheat.

However, Black Sea wheat supplies could be significantly lower in the upcoming 2023-24 marketing year if recent forecasts materialize. Month-old Russian industry estimates see the top exporters’ 2023 wheat harvest falling at least 15% on the year on lower planted area and tough weather conditions.

Although winter weather has been gentle to Ukraine’s crops, the ongoing conflict has reduced the country’s 2023 winter wheat plantings 22% below last year’s harvested area.

According to U.S. Department of Agriculture estimates, Russia and Ukraine in 2022-23 will combine for 27% of world wheat exports, up from 26% in 2021-22. This could be a top exposure point for global wheat buyers, who have recently reduced forward purchases, hoping to avoid higher prices.

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U.S. CROP CONDITIONS

Recent rains for parched winter wheat in the U.S. Plains have also added to wheat market pressure, though updated crop conditions released late on Monday suggest risks remain.

As of Sunday, winter wheat in top grower Kansas was rated 19% good or excellent (GE), down from 21% a month earlier and at the end of November, and down from 25% a year ago. Some 51% was in poor or very poor condition (PVP), the worst so far this season and up from 38% a year ago.

A larger rain event moved over Kansas late on Sunday into early Monday, so it is unclear if the crop conditions reflect this. However, USDA officials have said in the past that most weekly crop progress data is reported on Mondays.

Winter wheat in Texas and Oklahoma is not doing well, but it is better than a year ago. This week, Oklahoma is at 36% GE versus 17% a month ago, 31% in November and 11% a year ago. Texas GE is 19% versus 14% last month, 21% in November and 8% last year.

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Additionally, Oklahoma and Texas PVP at 41% and 49%, respectively, are down from 65% and 75% a year ago. Kansas, Texas and Oklahoma planted half of this year’s U.S. winter wheat acres, and producers there are hoping yields will rebound from last year’s drought.

Prospects may be decent as above-average precipitation is forecast to prevail through mid-March. Such a poor start to the season may not allow for good yields, but plentiful spring rainfall is key to recovery and past similar years suggest near average results could be possible if weather cooperates.

USDA’s tentative 2023-24 balance sheet for U.S. wheat, published last week, maintains domestic supplies at decently below-average levels despite a four-year high in production. USDA’s harvest forecast assumes a return to normal yields, though it reflects a reduced harvested area percentage in Kansas, Texas and Oklahoma due to the ongoing drought. Karen Braun is a market analyst for Reuters. Views expressed above are her own.

(Writing by Karen Braun Editing by Matthew Lewis)