Before the June USDA Supply and Demand Report, wheat took a conservative stance, with last week’s prices closing below the mid point of the most recent high and low for July wheat.
Speculators are holding a net bought position in grains, triggering some selling before the weekend. That set the market up to open on a weak note ahead of the report due Tuesday night our time.
The wheat market is caught between two competing forces. One is the high level of wheat stocks in the US, other major exporters like Russia, and globally overall. The other is a number of weather issues around the world that are still not resolving themselves fully.
The monthly USDA reports are a risk as they remind the market that stocks are high. Even if we see downgrades to 2018/19 production estimates, any positive price action faces some resistance from the weight of underlying stocks. Longer term though, the market will trade to levels that reflect the security of grain supply in the global market, and if stock estimates remain under pressure as they currently are, it helps build the story for strength in prices over the next 12 months.
On the weather front, regions where things have not been ideal generally improve. Canada is a good example, where dry conditions were seen at the start of their growing season. That allowed a rapid pace of planting, and their crops are in the ground, ready to go.
Meanwhile it has now rained, and those crops are getting the benefit. When we drill down though, crop development has been delayed, and like Australia, they still have limited subsoil moisture as a backup to their season.
In the US it has also rained in drought areas, but the key Hard Red Winter wheat regions in Kansas and Oklahoma remain drought impacted.. Harvest is gathering pace, and results, as is often the case, are mixed. Yields are low, but some paddocks do better than expected, and overall quality is not too bad, including bushel weights.
Russia and Ukraine are the big ones though, as has been the case for a decade now. Not much happens in the wheat market without some influence from the Black Sea, and that will be the case again this year.
The latest reports are suggesting that dry conditions in Russia are still compromising production potential, with another key report lowering the production estimate to around 14 million tonnes under last year’s big crop.
In Ukraine their weather bureau has warned that wheat production could fall by 15 to 30 per cent below normal, with some regions facing losses of 50pc because of drought.
The USDA has already flagged a much smaller crop for Russia this year, with a number of analysts saying that the US had overstated the fall in output. However, it would seem that over the last month a number of projections are getting closer to the USDA forecasts.
The next there weeks are critical for the Black Sea crop. Going into last weekend there were forecast for rain in the Ukraine this week. The qualifier was that eastern Ukraine and southern Russia were likely to remain dry, with forecasts for hotter weather, which will add stress to crops.
Coming out of the USDA Report, it will be crop conditions in the Black Sea which will decide the fate of wheat futures.