The 5 Fundamentals That Could Still Rally Wheat Prices
Last week was full of both bullish and bearish news for the wheat market. As winter wheat harvest begins across the country, one market analyst thinks the lower domestic wheat production also changes the dynamics in the wheat market.
While the Kansas Wheat Tour found a disappointing winter wheat crop, news of the Ukraine Black Sea grain deal extension extended for two more months also hit the market.
The Black Sea grain deal was facing an uncertain outcome, as Russia demanded concessions in order to extend the deal, However, Turkish President Tayyip Erdogan said on Wednesday, one day before Russia could have quit the pact over obstacles to its grain and fertilizer exports.
This week, there’s a new twist. According to Ukrainian Prime Minister Denys Shmyhal, one of Ukraine’s Black Sea ports halted operations because Russia was reportedly refusing to allow ships through.
UKRAINE'S BLACK SEA PORT OF PIVDENNYI HAS HALTED OPERATIONS BECAUSE RUSSIA REFUSES TO ALLOW SHIPS THROUGH - UKRAINE DEPUTY MINISTER — First Squawk (@FirstSquawk) May 23, 2023
At the same time, harvest is still a month away across parts of Kansas, and the Wheat Quality Council tour found an abandonment of 26.75% versus USDA’s current projection of 18.5%.
Arlan Suderman of StoneX Group says with all the news hitting the wheat market, risk management is vital this year, especially with both the downside and upside risks.
“Is the hard red winter wheat crop short? Absolutely it is. And it's shorter than what the USDA indicated. It's shorter than what the trade said,” says Suderman. “If you look at the six analog gears for crop condition ratings, five of those six years saw the hard red winter wheat crop gets smaller ahead of the final report on September 30.”
Suderman says while USDA’s crop projections could shrink, he says news of just how overpriced the hard red winter wheat is in the U.S. created a bearish sentiment last week.
“We have milling wheat from Europe coming into the United States, and it pencils out right into the interior of the United States. And so that is a big psychological impact on the market. It's been going on for 90 days, but Bloomberg finally picked up the story and kind of woke up the market to the reality. And that pulled the legs out from underneath the only real bull story we had in the grain and oilseed complex right now,” says Suderman.
Can the wheat market still get rallies? Suderman says that’s certainly possible, but he says it now emphasizes just how much world markets matter in wheat. And he says it’s these five factors that will play into prices in the months ahead:
- Whether it rains in Argentina so farmers can get their winter wheat crop planted.
- Whether El Nino cuts the size of the Australian crop.
- Whether it stays dry now in the U.S. spring wheat belt.
- How dry it gets in Russia’s spring wheat belt.
- Weather conditions in Canada's spring wheat belt.
“All of those things matter a whole lot more now,” says Suderman. “So it's possible, not necessarily that it will happen, but it’s possible that we could see a rally based on one of those factors.”
The United Nations said last week that the grain deal renewals, including the one last week, is helping stabilize the market and reduce volatility. The group noted that global food prices had fallen 20% since hitting all-time highs in March 2022.
