Kub's Den

Should We Be More Worried About Wheat?

Elaine Kub
By  Elaine Kub , Contributing Analyst
The latest U.S. Drought Monitor shows large regions plagued by expanding drought, some of which overlap with major wheat-producing regions. (USDA graphic)

Wheat prices are pretty motivating this spring. And sure enough, the market plans to respond -- wheat acreage is expected to reach 46.4 million acres this year, up 5% from 2020. This isn't huge in historic terms (in fact, it's the fourth-lowest wheat acreage number since 1919). The highest-value wheat varieties -- durum and hard red spring wheat -- are actually projected to have fewer acres planted than last year, according to USDA's annual Prospective Plantings survey. There are nice dry conditions for Northern Plains farmers to get out and plant spring wheat, if they wanted to, with the aim of delivering it against the September Minneapolis futures contract, hovering around $6.30 per bushel.

Well, not just dry conditions, but very dry conditions; drought, even. I write to you from a farm in north-central South Dakota, somewhere within the ugly orange blob of "severe" drought on the latest U.S. Drought Monitor. I don't grow wheat myself, but out my window I can see my neighbors' drills kicking up dust on the horizon. As of April 4, this state had 11% of its spring wheat already planted, compared to the five-year average of 4% planted by this time of year. "Plant in dust; bins will bust," they say in Kansas. Does it work that way for spring wheat in the Dakotas?

Futures traders must think so.

Benchmark Chicago wheat futures have deteriorated 11% off their January highs. New-crop KC hard red winter wheat futures have dropped more than $1 per bushel since late February. The erosion in new-crop Minneapolis spring wheat futures hasn't been quite as extreme, but nevertheless, these slides have happened despite the rest of the grains sector, corn and soybeans, specifically, rallying to fresh contract highs.

Shouldn't these markets all move together?

To be fair, wheat prices are higher than they were last fall, benefiting from the same commodity bullishness and food price inflation ideas that have pulled most agricultural commodity prices upward in recent months. But they aren't as much higher as it seems they should be, if this is the one U.S. grain market that's actually experiencing the effects of drought right now, at this moment, unlike the row-crop markets, which are already receiving bullish concern about drought effects that may or may not ultimately affect their yield once the growing season really gets underway.

That's my thinking, anyway, every time I look at the futures charts and see wheat prices languishing with less impressive gains than corn and soybeans. However, like most farmers, I admit I am susceptible to a malady called "backyarditis" -- the tendency to look out at my own backyard and extrapolate those alarming, bullish conditions to the whole North American grain-growing region.

The latest U.S. Drought Monitor, measuring conditions as of March 30, describes expanding extreme drought in the High Plains, with North Dakota's soil moisture below the fifth percentile of historical observations. Some portions of Colorado's year-long drought improved slightly over the week, but farther into the West and Southwest, widespread extreme and exceptional drought continues to reign -- and some of that's in wheat country. New Mexico's latest Crop Progress report showed 80% of the state's winter wheat is rated either "very poor" or "poor."

I can see why maybe the futures markets aren't freaking out about New Mexico's wheat production alone: in 2020, the state produced just over 3.2 million bushels (mb) of wheat, or less than two-tenths of 1% of total U.S. wheat production. However, other drought-stricken states are bigger players. Texas grew 62 mb; South Dakota grew 71 mb; Idaho grew 112 mb; Montana grew 227 mb, and the biggest wheat producer of them all -- North Dakota -- grew almost 313 mb of wheat in 2020 (17% of the U.S. total). Well over half the nation's wheat production occurs in states that are experiencing some form of drought now in the spring of 2021.

But that brings us to the other half of states, and the big portions of even some drought-stricken states that are actually in good shape this spring. Most notably, we have to consider Kansas (at 281 mb in 2020, the second-largest wheat grower with 15% of the nation's crop), and Oklahoma (104 mb, 6%). Deeper into the Midwest, look at most of Illinois setup for an excellent start to row-crop season and favorable conditions for its wheat production (35 mb in 2020, 2% of U.S. wheat, now with 74% of their 2021 winter wheat rated "good" or "excellent" on April 4).

The big Kansas hard red winter wheat crop isn't thriving quite as lusciously as the Midwestern soft wheat -- their latest Crop Progress report showed 54% of the crop rated "good" or "excellent." Nevertheless, I think we've solved the mystery of why KC wheat futures, especially, aren't following along penny for penny with the rally in corn and soybean prices. In a world where the 2020-21 U.S. wheat stocks-to-use ratio is nearly 40%, there just isn't enough legitimate fear about a shortage. I suspect we will still see rough correlation between corn prices and hard red winter wheat prices this summer as livestock feeders seek out whatever feed grains are available, but apparently it will take more than a drought in my backyard to really move the market.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

Elaine Kub