The world wheat market is certainly at the whim of the weather right now with futures markets bouncing sharply off an eight-month low set early last week as concerns for the state European Union (EU) winter crop start to outweigh those of the Russian crop.
As the world emerges from the global coronavirus shutdown, northern hemisphere weather, especially in the EU, Russia and Ukraine, will most likely be the key wheat market drivers over the next six weeks.
The buyers supposedly came back into the market on talks of decreased production in Russia, but most analysts appear to be holding their estimates firm in the 75-77 million metric tonne range, well up on last year. The winter wheat areas have received some rainfall in recent weeks and are holding production but the spring wheat areas, particularly Siberia, do appear to be suffering from lack of moisture and the 14-day forecast is not favourable.
There has been very little chatter about the growing production concerns across many parts of the EU. The newswires tend to focus far too intently on Russian crop prospects these days, as they are the world’s biggest exporter of wheat, and tend to set global export values.
Interestingly, with restrictions on Russian wheat exports for the last two months of the current marketing year, the EU has usurped their crown for the 2019/20 season, as their exports pass the 35 million metric tonne mark, with six weeks of the old crop year remaining.
Large swathes of western and central Europe have received insufficient spring precipitation to replenish soil moisture levels as the crop moves into its reproductive phase, the peak water use growth stage. Daytime temperatures have also been above average and radiation levels have been extremely high.
Consequently, crop biomass accumulation has slowed considerably with actual crop conditions generally worse than in 2019. Additionally, many spring crops were sown into inadequate moisture and germination has been poor.
The forecast for dryer than average conditions for many parts of France, Germany and Poland for the next couple of weeks will undoubtedly stress the crop in some regions. There is some rain in the forecast, but it is much less than what is being lost to evapotranspiration. Much more is needed in the next few weeks to maintain yield potential.
Romania and Bulgaria would appear to have serious production losses in the offing as drought conditions persist. Soil moisture is so poor in some areas that crops are reported to be stunted and showing signs of wilting and early leaf senescence. No amount of rain will prevent severe production losses in the affected plants.
While not as acute, there are production issues in Austria, Slovakia and the Czech Republic, namely, soil moisture deficits and daytime temperatures up to 2°C above the long term mean. This is hampering winter crop development, bringing their yield outlook below the five-year average.
European crop monitor, MARS, called the new crop milling wheat yield 5.72 metric tonne per hectare (MT/ha) compared to the 2019 yield of 6.00MT/ha. This down from April’s forecast of 5.87MT/ha and is almost 1 per cent below the five-year average of 5.77MT/ha. Durum wheat yields were also lower at 3.38MT/ha compared to 3.47MT/ha last year, 3.43MT/ha last month and a five-year average of 3.49MT/ha.
These yields put the total EU wheat crop at around 139 million metric tonne. This is 4 million metric tonne lower than last week’s forecast from the United States Department of Agriculture (USDA) of 143 million metric tonne and is 16 million metric tonne lower than the 155 million metric tonne produced in 2019/20.
Contrary to some news reports last week, the window for serious damage to the northern hemisphere crop is still wide open. All the major crop failures in Russia of recent times have been a result of the weather problems in June, July and August, so there is still oodles of time for production prospects to worsen; or improve.
In last week’s global supply and demand update for the USDA, total 2020/21 wheat production in the seven major exporters was 1 million metric tonne higher than last year at 378 million metric tonne. However, a production decrease amongst the northern hemisphere exporters of 10 million metric tonne was more than offset by a 12 million metric tonne production increase by the southern hemisphere exporters: namely Australia and Argentina.
In other words, the global wheat balance sheet is relying heavily on the increase in southern hemisphere production. The challenge is the Australian and Argentinian winter crops are still being sown. They have the entire production cycle ahead of them, and the resultant output won’t hit the export market for another six months.
And that is using an EU wheat crop estimate that is much bigger than most of the European trade is forecasting. Additionally, the USDA report had the combined Russian and Ukraine wheat production at 105 million metric tonne, which also appears to be on the optimistic side compared to estimates from several industry pundits.
The washup here is the EU, Russian and Ukraine winter crops need rain, and they need it quickly. And well above average precipitation, coupled with favourable crop conditions, are required through to harvest for current yield estimates to be maintained.
The big unknown in the whole equation is what impact has the coronavirus had on global wheat demand? If demand recovers quite quickly, then further supply issues will be bullish for new crop values. If there has been some severe erosion of global wheat demand in the 2020/21 marketing year - which is the most likely scenario - then the market can absorb further northern hemisphere production issues with minimal upward pressure on price.
Of course, if the EU and/or Russian 2020/21 winter crop production stabilises, or surprises to the upside, then last week’s futures low will likely be tested as the new crop harvest approaches.
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