Dry field

The latest USDA US crop condition report has revealed that the US winter wheat crop may be in worse condition than the trade has been expecting. With the market already volatile, this latest crop report has the potential to send wheat markets substantially higher if conditions play out for it to be fully priced in.

On Tuesday, the USDA crop condition report indicated that only 30% of the US winter wheat crop was rated as being in good to excellent condition. (figure 1)

This poor assessment of the US crop is reflective of ongoing drought conditions in the US. In addition to the dismal proportion of top performing acres, 36% of the crop area was assessed as in poor to very poor shape – not even making it to the fair rating, making it the worst start to the season in over 10 years. (figure 2)

General consensus among analysts and traders in the market was surveyed to sit at around 40%, 10% above the USDA’s estimate. CBOT SRW futures reacted strongly to the news, lifting 6-7% across the curve, with JUL-22 contracts reaching $AU 512/ tonne. (figure 3)

However, poor wheat condition in early April will not necessarily spell disaster for the final harvest output come the end of the season. If the impacted US wheat growing states receive critical rainfall, post emergence from dormancy over the next month, the crop could recover and deliver reasonable yields. There is still the potential for the US to produce a solid wheat crop despite the dire forecasts, given that the area planted to winter wheat, at 34.2mn acres, is the highest in the last six years.

Unfortunately, the weather outlook due to the influence of the La Niña phenomenon is not looking promising for the US (or for many parts of South America).  Largely due to the La Niña fueled drought, conditions across 41% of the US spring wheat zones (figure 4) are expected to suppress spring wheat planting. The most recent prospective plantings report indicates that at 11.2 million acres, we may be looking at the lowest US spring wheat acreage in 5 years.  

This uncertainty about the US wheat crop comes at a time when wheat markets are already extremely sensitive to news due to the existing tight supply and demand balance outlook due to the impact of war on Black Sea wheat production and export capability.

While the Ukrainian government has not released an official wheat crop estimate as yet, eastern European commodities consultancy APK-inform has tipped the crop to be down 54% to 15mmt due to an expectation of severe disruptions as a result of the ongoing war.

Regardless of the success of the Ukrainian wheat crop, the question remains of how the grain will be exported out of the country given substantial damage has been inflicted upon rail, road and port infrastructure, even if the war comes to a speedy end. APK-Inform reports that rail transport of grain to Romania is already snarled in delays, and costing ~$US 150/ tonne, compared to $US 40 / tonne to black sea ports before the war. The Ukraine government’s target of 600kt a month equates to barely 10% of typical wheat and corn exports, highlighting that renewed access to ports will be mandatory to restore grain flow.

What does it mean?

The addition of potential for US wheat supply to be under threat into an already incredibly taught and volatile trading environment has lifted prices. All eyes will be on whether it rains sufficiently over April, confirming or dispelling the need for a dismal US wheat crop scenario to be fully priced in.

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Key Points

  • ~30% of US winter wheat rated good-excellent, 36% Poor/Vpoor
  • Solid April rains could reverse any yield downgrade
  • Market reactionary due to tight supply & demand balance.

Click on figure to expand

Click on figure to expand

Click on figure to expand

Click on figure to expand

Data sources: Refinitiv, MATIF, Profarmer, USDA, Mecardo.

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