Frosty wheat

It might not be much, but the recent moves in wheat have broken a month-long downtrend. The “bearish” news has run its course and the market has decided to focus on the potential for escalation of hostilities in the Russia & Ukraine conflict and US (Hard Red Winter) HRW wheat production.

Chicago Board Of Trade (CBOT) is caught between a sluggish export pace and the threat of freeze damage in the HRW areas. Unseasonably cold temperatures from the Canadian Prairies through to Texas have raised concerns of winter kill in areas without protective snow cover.  From memory, the critical temp is -12C, below which freeze damage is possible.  Over the past week, minimums have regularly dropped below this threshold.  The defining point will be the duration and amount of snow cover if any.  There are areas, including the key producing state of Kansas, where the crop is rated 47% poor to very poor.  Further stress here is not likely to be a good thing.

Weather is going to become a key driver in wheat markets over the next couple of months.  The market and its participants (I’m looking at you speculation traders) will be hovering over rain forecasts like a hawk scouting for mice.  We have already had a taste of it with the drought, and now timely rain in Argentina.  Soybean and corn crop condition scores have improved from 7% – 12% good to excellent and 12%-22% respectively since the rains arrived. 

Southern Russia has been anomalously dry in the past 30 days.  This is a key growing region due to its proximity to Black Sea export channels.  There is plenty of time however for a correction.  Coupled with Moscow’s stance of not wanting to ‘export everything’, I suspect this will create some fears over ongoing cheap grains out of the Black Sea.

The other thing that may get the market a little excited, is the looming expiry date (mid-March) of the current Black Sea Grain Initiative (corridor).  For the corridor to remain open, it requires the goodwill and cooperation of all parties.  Currently, Ukraine is complaining that the Russians are not providing – or at least delaying – cargo inspection personnel, thus delaying Ukrainian exports. 

There is also a distinct possibility that in the face of the West providing Ukraine with more heavy armour, Russia will fight fire with fire. An escalation of the war (a spring Offensive?) could jeopardise the agreement.  At the end of the day, it is all just speculation, but it is exactly the type of scenario that the markets will be monitoring; and positioning their trades accordingly.

Next week

The open interest in CBOT wheat is building a sizeable short (sold) position.  Any supply issue or production concern could spark a violent short-covering rally as poorly placed trades rush to exit. As we head into the northern hemisphere spring, expect continued volatility.

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Data sources:  SovEcon, Reuters, USDA, Mecardo,

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