The Bull Case for Wheat Backed by Post-Covid Reopening, Weather Extremes and Resumptions of Export Bans

Wheat futures on the Chicago Mercantile Exchange climbed to a three-month high on Thursday after the USDA cut its forecasts for global production and criticized the major wheat exporting countries’ decision to suspend external shipments. At the same time, quotes for December futures for milling wheat on Euronext rose on Thursday to €249.75 per ton, which is at an 8-year high.

The published monthly report (August) lowered the US government's estimates of the wheat crop by about 24% in Canada and 15% in Russia due to hot and dry weather conditions. The drought also hampered US wheat production, which was forecast at a 19-year low and 2.8% below the government's July forecast.

CME soft wheat (SRW) futures declined 19.3% from 763.5 cents a bushel to 616.5 cents a bushel from early May to mid-July in anticipation of the new season and higher grain sales, however those expectations ended up being short lived. According to the Opening Broker review, excessively severe weather conditions in some farming states in the United States have resulted in an almost complete loss of spring wheat crops in the new 2021/22 season.

The forecasts for the wheat harvest in Russia have also begun to be revised downward due to the dry and hot summer, while conversely in Europe, farmers began to doubt the grain quality of the new harvest after excessive rainfalls and floods have damaged some growing areas. As a result, SRW futures rose 17.2% from mid-July to early August to 722.5 cents a bushel, almost offsetting the decline in prices ahead of the new season.

According to the July estimate of Strategie Grains, the grain harvest in Europe in the 2021/22 season will amount to 293.7 million tons (+16.7% compared to the previous season), with the production of soft wheat expected to grow the most, by 14.2% to 133.0 million tons, followed by corn – by 2.4% to 65.7 million tons. The harvest acreage will grow by an average of 0.8% by the end-2020/21 season, while the grain yield in the new season will, on average, be 0.2% higher than in previous. Wheat exports from the EU and the UK in the 2021/22 season are estimated at 30.0 million tons versus 27.0 million tons in the 2020/21 season.

It looks like in the coming months, the agricultural markets will remain stressed by the weather factor, as well as expectations of harvest volumes and the state of demand, especially from China and the Middle East. The spread of new waves of coronavirus infection and the resumption of quarantine measures could further bolster the grain and oilseed markets, making almost a perfect case for bulls. Technically speaking, after piercing the $7.6 per bushel level and still moving higher, the wheat futures are looking towards the $8.0-8.2 range.