Over the past week, the wheat market welcomed a rally of 64US¢/bu on the back of some bargain buying but also a deteriorating corn production outlook. While the market conditions haven’t changed, last night saw some technical profit taking as investment sentiment soured.

The Profarmer Crop Tour (for those on Twitter #pftour22) has been cutting back and forth across the corn and bean states in the US taking samples and yield estimates. While the sampled data will still have a lot of questions over it, the results are consistently showing a below trend line yield estimate.  Should this eventuate, it will tighten corn stocks further and should lead to price support.  As corn is the cheapest and most abundant feed source, this will have flow on effects to wheat and barley.

The bounce was very welcome after the ag commodity markets saw some sustained losses due to a perception of building stocks in major exporters, rain over the Australian cropping belt and in the US row crop areas, and the ongoing success of the Black Sea grain corridor.

The latter is largely psychological, the flow of grain is only small but it is symbolic, that the supply issues we thought impassable, do actually have a chance of success.

The price of wheat in Russia and Ukraine is seriously cheap and has the risk of setting a ceiling if (and it’s a big IF) grain can start to flow the way it used to.  Ukraine origin grains are likely to remain cheap to help kickstart the agricultural economy in time to fund the next season’s winter wheat crop which should be going in the ground over the next month. 

The pace of exports out of the Black Sea remains a point of concern.  Since the grain corridor opened, 30 vessels have sailed from Ukraine containing about 700kmt of grain (manly corn).  It is thought that Ukraine could supply as much as 2mmt per month, so the first point highlights the difficulties ahead.  Similarly, Russian exports are lagging.  To achieve their 44mmt export target, approximately 5mmt per month is required.  At this point, only 3mmt per month is being achieved.  Buyers of Russian grain are having trouble getting letters of credit and the freight and insurance costs are eroding any benefit the cheaper origins have against other exporters (i.e. Australia).  But the longer the corridor remains open and the more success importers have in securing Black Sea grain, we may find the risk premium diminish.

There remains a heightened risk with the ongoing war in Ukraine.  Missile attacks have again recorded around the port city of Nikopol, near the nuclear power plant at the centre of the front line.  The power plant, the largest in Europe, is being used as a Russian base and arms depot and is obviously a very sensitive target.

Demand for European grain is running hot.  The French line up is booked solid with 1.4mmt on the stem for August.  Business includes mainly North African and Mid East destinations.  China has also booked at least 5 Panamax vessels for Nov/Dec delivery.  We would expect French wheat to start pricing in a premium due to extremely low river levels across Europe creating a bottleneck of getting stock from up country to port.  The drought, believed to be the worst in 500 years, is also raising some concern about the ability of the new season 22/23 winter seeded crops to establish in time before the colder months set in.

The week ahead….

The ‘big end of town’, investment firms, fund managers etc, continue to pull the strings in the ag markets.  Eyes will remain focused on the US corn yields and will be watching early harvest deliveries for confirmation of crop tour results.

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Data sources: Reuters, Profarmer, SovEcon

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