Todd's Take

Three-Month Slide in HRW Wheat Prices Appears to Be Over

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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From mid-May to mid-July, large speculators liquidated 22,144 long contracts in KC wheat or 37% of their positions, a bearish change in sentiment at a time when USDA is estimating the lowest ending HRW wheat stocks in nine years. (DTN ProphetX chart by Todd Hultman)

It seems fair to say 2022 is going to go down in the history books as a year to remember for wheat. In the case of hard red winter (HRW) wheat, DTN's national index of cash prices started the year at $7.84, near its highest prices in nine years, and hit the turbocharge button after Russia invaded Ukraine, a move that simultaneously scared speculators out of their short positions and sent DTN's index soaring to a high of $13.15 on May 17.

The $13.15 high exceeded the old high from February 2008 by 25 cents, but not for long. In mid-May, talk surfaced that Russia was proposing to allow grain shipments to leave Ukraine unmolested and, frankly, I didn't buy it at the time. There had already been several accounts of horrendous acts committed by Russian forces upon Ukrainian civilians and the proposal seemed like a trap. How could anyone trust the word of Russia's President Putin?

Apparently, large speculators holding 60,349 contracts long in KC wheat at the time saw things differently. Specs responded to the news by bailing out of their long positions, eventually taking DTN's index below its 100-day average for the first time since before Russia's invasion. The selling picked up more steam on June 22 after Federal Reserve Chairman Jerome Powell mentioned recession was one of the risks of trying to control inflation.

In 76 days, DTN's index dropped a quick $5.42 per bushel to $7.73, the lowest since early February. It was difficult to explain that large of a drop for a commodity USDA says will have its tightest surplus in nine years when the season ends on May 31, 2023.

Granted, the argument could be made that the $13.15 peak was an emotionally bullish market response to Russia's attack, but the uncertainty of the situation in Ukraine should not be underestimated, even today. Sources from within Ukraine have said producing wheat is no longer profitable and some have estimated this fall's winter wheat planting could be down as much as 30% or 40% from a year ago.

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Reliable market information is one of the casualties of war, so it is difficult to know how accurate these assessments about Ukraine are. Another risk I wrote about on Aug. 19, is that artillery shells have come dangerously close to the nuclear plant at Zaporizhzhia, Europe's largest nuclear reactor. The International Atomic Energy Agency recently confirmed the potential for a radioactive catastrophe remains high -- a factor traders have not even begun to consider (see https://www.dtnpf.com/…).

As you know by now, Russia proved me wrong and eventually did allow ships carrying grain to leave Ukraine. DTN's index of HRW wheat prices chopped steady to lower throughout July and early August, hitting a low point of $7.63 on Aug. 18. The movement of grain has been helpful to Ukrainian farmers, but in terms of global supplies, this summer's shipments haven't really moved the needle for global supplies.

USDA's latest WASDE report estimates global ending wheat supplies, excluding China, will total 4.56 billion bushels in 2022-23, the lowest in 14 years. Ukraine's wheat exports are expected to total 11.0 million metric tons or 404 million bushels in 2022-23, a little over half of the previous season's level. With fall planting encountering extremely difficult conditions, Ukraine's wheat exports in the next season are likely to be even smaller.

Since Aug. 18, U.S. HRW wheat prices have found renewed support. The amount of long positions in KC wheat held by the spec crowd is still not far from its lowest level in seven years and the difference in price behavior is noticeable. It was especially impressive to see DTN's National HRW Wheat Index gain a nickel on Tuesday, Sept. 13, a day when the Dow Jones Industrials were down over 1,200 points and the December U.S. Dollar Index was up 1.43 points.

With fewer specs now in the wheat market, DTN's National HRW Wheat Index at $9.05 on Wednesday evening, Sept. 14, is starting to show more respect for wheat's tight supplies and for the difficult planting conditions in the southwestern U.S. Plains. The seven-day forecast remains mostly hot and dry for the region, and it is difficult to know yet if this fall's planting will get help from the rain it needs.

Technically speaking, the new uptrend in HRW prices since Aug. 18 is encouraging and, with Northern Hemisphere wheat production almost done for the year, a rebound to somewhere between $10 and $11 seems reasonable with end users having to compete for limited supplies the next six months or more.

Unexpected surprises are always part of the risk and who knows what the situation in Ukraine will look like a year from now? For the foreseeable future, however, things are looking up for HRW wheat prices, at least until the spring of 2023.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Todd Hultman can be found at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman1

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Todd Hultman