Agricultural raw materials: Renewed volatility in wheat prices

Volatility has been spreading to the soft commodities market for several weeks, pushing the soy, corn and wheat markets up in unison. Weather conditions in major export areas are once again blowing hot and cold over Chicago, as operators closely scrutinize production risks region by region.

Record rainfall in the United States

Intense rainfall events have hit the Corn Belt, with no lull since March, prompting the United States Department of Agriculture (USDA) to significantly reduce its yield and maize production estimates. While these downward revisions specifically concern maize, the increase in prices has a domino effect on wheat, especially since American farmers have never planted so little wheat.
 

U.S. wheat acreage by class - source: USDA

At least that's the USDA's assessment that wheat acreage, whose prices have dropped significantly since peaks in 2012, is expected to reach 45.8 million acres (12.2 million hectares). This decrease in surface area is obviously synonymous with lower production, especially in the event of lower yields. 

A heatwave in the Black Sea

While the rain is worrying across the Atlantic, it is on the contrary the heat that threatens Russian production and more generally the Black Sea. The high temperatures recorded since the beginning of the month in Russia (above 30°C) do indeed constitute a risk on wheat, particularly on its quality, which could be revised downwards.

It is not without recall that this region of the globe tends, through its production, to establish itself as the new nerve center of the wheat market. In this context, the slightest suspicion of a drop in production in Russia constitutes a buyer's relay on wheat prices.

However, the impact of this heat wave must be qualified since, at present, the situation is rather favorable in the Black Sea basin, with well oriented production and export prospects. The International Grains Council (IGC) forecasts production for the 2019/2020 season at close to the 2017/2018 record of 79.5 million tonnes, while Russian wheat exports are expected to stabilize at around 35 million tonnes (see graph).
 

Evolution of Russian wheat production and exports - source: IGC

 

Europe surprises positively

The 2019/2020 season is much more favorable than observers expected just a few months ago. Production prospects are thus moving towards 143.8 million tonnes, at least that is what the European Commission predicted a month ago, when it forecast 141.3 Mt and only 128.6 MT last year. Export availabilities should thus increase despite the drought problems encountered in Spain.