Wheat now deeply oversold (or is it?): Combyne examines last week
Grain markets experienced another hard and fast week of selling, with the wheat complex and corn seeing the largest losses.
Despite neutral-to-bullish acreage and stock reports released by the USDA on Thursday, June 30, with being the month and quarter-end, traders seemed content to take their money and head to the sidelines ahead of the holiday long weekend.
Except for soybeans and soymeal, all grain commodity futures finished the month and calendar quarter in the red. Most analysts are now suggesting that a major weather scare will be the only thing that brings more hedge fund dollars back to the grain complex, but these same analysts are also arguing that market participants are no longer trading off fundamentals.
Also influencing this past week’s selloff was ongoing concerns of a global recession, and slowing demand as new crop supplies start to market in the northern hemisphere, especially for wheat. In fact, Chicago SRW wheat’s front-month contract is now 34%, or $4.39 USD/bushel, below its high seen back on May 17. Similarly, net-long positions in soybeans and corn held by money managers are now at their lowest since January and last October, respectively. That said, front-month contracts have risen significantly in the last half of the 2021/22 crop year, while the selling in the last six weeks for the new crop hasn’t helped its calendar-to-date performance (as shown below).
In non-USDA wheat headlines, the EU Commission lowered its soft-wheat production forecast by a significant 5.4 MMT, down to 125 MMT. If realized, this would also be 5 MMT below Europe’s soft wheat Harvest 2021 and is largely attributed to the hot, dry conditions that hit France and Italy this June. The EU Commission stayed EU wheat exports though, thanks to strong regional demand with limited supplies of Ukrainian wheat making it to the international market. On the flipside, SovEcon raised its estimated Russian wheat exports to a record high of 42.6 MMT, mainly because they also expect a record harvest of 89.2 MMT. Their export forecast could obviously change if more sanctions are imposed on Russia, but who’s going to exacerbate things when a food crisis appears likely? The OECD is estimating that 19M more people “could face chronic undernourishment globally in 2023 if exports from Russia and Ukraine remain constrained by war.”
As such, the largest bearish variable that I’m watching across the pond is whether Ukraine’s ports will open back up, and UkrAgroConsult believes that this could happen by September (and some of this week’s sell-off in corn and wheat could be attributed to this prediction). Should the ports open, the firm is forecasting that Ukrainian wheat exports will top 16 MMT, well above the USDA’s current expectation for 10 MMT. Of note though is that Russia currently controls the area where three major ports - Chornomorsk, Pivdennyl, and Odessa – are located. These 3 areas collectively accounted for 57% of Ukraine’s grain exports last year! UkrAgroConsult is also forecasting a 10 – 15 MMT storage shortage in the country by the end of the corn harvest in December.
While the Black Sea war is in the back of traders’ minds, given the liquidation seen in grain markets over the last two weeks, there are more skeptics out there that even a weather rally can be sustained. However, the balance sheets remain relatively tight, even though Thursday’s stocks report suggested a few more bushels of corn, wheat, and soybeans. Year-over-year though, there are significantly fewer supplies of small grains.
As for the acreage report, the USDA didn’t print near as many soybean acres as the market expected, suggesting that the oilseed trading will be more weather-sensitive than that in wheat or corn. For the latter, the USDA admitted that there were still over 4M acres of corn left to plant as of June 1 (when their surveying ended), nearly double the unplanted acreage at the same time in 2021. As expected, corn acres in the Dakotas are down 900,000, and a national total of 89.9M corn acres, this is still well below the 92M the market and the USDA were expecting as recently as March and February, respectively.
As for wheat, the average pre-report guesstimate for total acres was fairly close, but the USDA suggested more spring wheat and durum acres than once thought. Leaning in, North Dakota’s spring wheat and durum area were pegged 200,000 and 70,000 acres higher than the March estimate, while Montana’s spring wheat and durum acreage were lowered by 300,000 and 50,000 compared to the spring forecast. Overall, American farmers’ Plant 2022 for wheat is the fifth-lowest acreage since record-keeping started in 1919.
Staying in acreage, this past week’s Manitoba crop report suggested that 700,000 acres went unseeded this year in the province due to the wet spring.