While most commodities have been falling to multi-month or multi-year lows, the wheat market bucked the trend and went on something of a wild bender. In mid-May wheat prices rallied by over $1 per bushel in the space of just five sessions. The rally came unglued over the next two weeks, erasing just about the entire advance (Chart 1).
The reason for the rally was a series of production-related problems for both maturing Northern Hemisphere crops and soon-to-be planted Southern Hemisphere crops.
Very hot weather and strong winds in the US Plains suddenly threatened what was expected to be a bumper crop. The most recent USDA weekly progress report shows that the good-to-excellent portion of the crop fell to 52%, from 54% the previous week. Just a few weeks earlier, that figure had been 60%.
The news from the FSU wasn’t really news at all. Drought and frosts wreaked havoc with wheat crops, particularly in the Ukraine and Kazakhstan well back in February and was documented in Focus on Futures on April 30.
Recent estimates put the 2012-13 Ukrainian crop as low as 12 million tonnes, down from 22 million tonnes in 2011-12. That’s below the USDA May estimate of 13 million tonnes. The USDA estimates that exports will fall by only 1 million tonnes, to 4 million tonnes. For that matter, the Agriculture minister claims that exports will remain at last year’s level. Last year’s domestic food and feed usage was close to 15 million tonnes. Supplies for the domestic market will have to be compromised to accomplish maintaining exports at any level. That is one possibility. The other is that the government will restrict exports – although government officials say they intend to honor all export commitments.