There is a view building that weather conditions are going to be an issue for the US wheat crop this year. We have just come through a particularly cold period in the US where some winterkill damage will have been done. Some parts of the Hard Red Winter wheat regions are also suffering from drought.
We won’t know the full extent of the winterkill damage until after the crops break dormancy, and we won’t know if the drought will manifest in full until we see how the growing season unfolds. So, while the risk remains, with potential for that to support US wheat futures during the year, we are sill trading in a period of US production uncertainty where the main known factor is current high domestic wheat stocks in the US, and high global wheat stocks.
The cold weather did provide some support for US wheat futures in the first week of the New Year, but when prices failed to match values in late November, the market faltered, and prices have eased. To be fair though, we started this week with prices back to the top of the trading range seen for much of December, and to the bottom of the trading range during November.
In Russia there are also growing concerns from current weather conditions. The winter so far has been very mild. This has allowed uninterrupted shipping from major export terminals and will result in Russia being able to export more wheat than the market had been allowing for. This has continued to pressure global wheat prices.
Meanwhile in central Russia, instead of crops being under several feet of snow, they are snow-free, and growing rapidly without yet entering dormancy. The lack of snow cover, and advanced state of the crop, is now leaving it vulnerable to a change in the weather to more wintry conditions.
This week should see temperatures drop sharply, and with the current lack of significant snow coverage, winterkill losses are on the cards.
In recent seasons, mild winter conditions, or short winters, have allowed crops in the Black Sea region to develop much more than normal, effectively extending their growing seasons and delivering very high yields.
This is also a risk for this year as well, given the mild winter to date, but if significant winterkill damage is incurred, it may cancel out the positive impact on yield potential from the warmer conditions seen to date.
The potential for weather issues for both the US and Russian wheat crops is something to watch this year. If it unfolds that way, reduced output from both countries should be very supportive of wheat prices both domestically in the US, and globally as the influence of Russia is pulled back a little.
Reduced exports from Russia and a decline in US wheat stocks are the two factors needed to allow global wheat prices, and US futures, to lift by the end of 2018. If they don’t occur either because production holds up, or carryover stocks allow strong exports to continue from Russia, we will have another year of low prices to endure before we get relief.
Meanwhile both US futures and cash prices in Australia have declined during our peak harvest period since the end of November. This week’s USDA Report may provide the catalyst for new price direction.
