There are a number of weather niggles around the world at the moment. It has been wet and cold in the US, prompting concerns about reduced production for winter wheat, spring wheat and corn. Planting pace has not been impacted in the end for either corn or spring wheat, but we may see more acres than normal abandoned, and areas being replanted are above average.
The other concern for the US is the impact of the cold, wet conditions on the winter wheat crop, particularly in terms of disease, quality, and disruptions to the early harvest. Despite the potential for issues, the USDA Crop Condition report does not reflect problems at this stage.
It is similar in Canada, where wet conditions have hampered planting, with seeding likely to extend well into June. Will that translate into reduced production, or are the delays going to be minimal, with the extra moisture adding to final production potential?
In Europe there are a number of regions across a number of countries that have experienced below average rainfall so far this growing season. Production estimates are being lowered, but remain above those of last year. France is now getting a hot spell which may exacerbate drought conditions.
Further east in the Black Sea region there are also reports that rainfall deficits are building in Ukraine. However, it remains early in their season, and any shortfall in rainfall can easily be reversed in June.
Even Australia is included in the list of weather issues because of our very patchy start to the season, with dry across parts of Western Australia, South Australia, NSW and Queensland. We also have longer term weather forecasts indicating below median rainfall as being likely.
The rhetoric about the wheat market is slowly changing from one of more than ample wheat stocks, to one where it is recognised that stocks outside of China are going to fall this year, with the first year on year drop in global wheat production in four years.
If demand remains unchanged on current estimates, and current projected exports from non US exports stay as estimated, then any further reduction in output outside of the US will push an equal amount of demand onto the US. This will tighten US wheat stocks. If the US itself has a downgrade in production it will add to the pace at which US wheat stocks decline this year.
So, for the first time for several years we have uncertainty surrounding the global wheat balance sheet that should be supportive of higher wheat futures prices, both now as that uncertainty plays out, and into the end of the calendar year as the forecast tightening of stocks outside of China triggers a year on year lift in US wheat futures.
One danger is that the excess moisture in the US and Canada will eventually lead to higher production, but that might be balanced by the yield losses elsewhere if it remains on the dry side.
The real key to a significant price rally probably lies with the Black Sea. If their production estimates pull back over the next month or so, we will enter the second half of this year with a very different outlook to that of the last couple of years.
At this stage Black Sea output will be down year on year, but not down severely enough to trigger an unexpected price rally.
