KANSAS CITY — A bevy of reports released in mid-January exuded a mildly bearish outlook for US wheat, but overall contained little in the way of headline-grabbing, market-shifting news. Analysts in January suggested the simmering Russia-Ukraine conflict, precipitation in US hard red winter wheat country, US dollar strength, and consumer demand in year three of the global pandemic could each exert outsized influence on wheat prices in 2022.

The series of US Department of Agriculture reports issued Jan. 12 brought a measure of relief to market participants concerned about tight supplies driving wheat prices higher. The USDA’s National Agricultural Statistics Service estimated 34,397,000 acres had been seeded to winter wheat, a 2.2% increase from 2021 and a 12.9% increase over 2020. At the same time, the USDA raised its 2022 wheat carryover by 30 million bus, or 5%, from the December forecast to 628 million bus, which, if realized, would be down 26% from 845 million bus carried over in 2021, and down 51% from 1,028 million bus in 2020.

“At face value, the numbers from the USDA had a bit of a negative lean to it, but one needs to be a little cautious in taking too much of a read on that because if you look at the past two years, we’re still trending the wrong way when it comes to overall wheat supply,” Brian Harris, executive director and owner, Global Risk Management, told Milling & Baking News.

Of the many uncertainties concerning the direction of domestic and global wheat markets, none was more critical than the potential disruption to wheat exports if Russian troops were to invade neighboring Ukraine. Russia is the world’s largest exporter of wheat, and Ukraine is the fourth largest. 

 “The consensus at this point is that if anything is going to happen, it would be after the Olympics,” Mr. Harris said. “The fact is that China is making it pretty clear that if Putin does something before the Olympics and upstages them, they’re not going to be happy campers, so the market’s taking a little bit of solace that there will be a bit of a pullback in tensions at least until the Olympics are finished up, so that’s taking some of this risk premium back out of this recent rally.”

The global wheat outlook in the Jan. 12 World Agricultural Supply and Demand Estimates report was for stable supplies, decreased consumption, reduced exports and increased stocks. In terms of global wheat production, relatively few changes were made for major exporting countries. Russian carry-in stocks were down and production estimates for Brazil and Paraguay were lowered. But those shifts were offset by production increases in Argentina and the EU, and ending stocks estimates in the eight major exporters were raised for a second consecutive month. That had wheat prices behind the eight ball fundamentally even before considering the geopolitical situation in Eastern Europe.

“We’re starting to develop a story that has pretty substantial bearish implications for a market that’s priced over $8 in the nearby Kansas City,” said Bill Lapp, president and owner, Advanced Economic Solutions. “I’m an economist, so I’m two-handed. On the other hand, of course, we’ve got two key elephants in the room, and one is the Russia-Ukraine conflict. In 2014, when Russia invaded Crimea, it didn’t yield much of an interruption in trade flow out of Russia or Ukraine. So, if it unfolds following the pattern of our one point of reference, it won’t have much of an impact. 

“We just don’t know what’s going to happen, and we may not know when there’s an outcome. We could still see a conflict between Russia and Ukraine a year from now and more saber-rattling. Do we maintain premiums or does the market get tired of this news? That’s a pretty big question, but I think the longer you go, especially if we go through a couple months of no export interruptions out of either country, that would be a pretty strong signal that they’re going to be in conflict, but the risk of them disrupting trade is less than we thought previously.”

The second elephant in the market, Mr. Lapp and other analysts said, is weather in the US Southern Plains, where the largest percentage of US hard red winter wheat is produced. That crop was left vulnerable by extreme dry weather throughout the fall and early winter. When USDA outposts in the Plains states posted monthly updates to crop progress and conditions in late January, dormant wheat was in worse shape than in the previous reports three weeks earlier. Kansas winter wheat was rated 30% good to excellent on Jan. 23, down from 33% at the last report Jan. 2. Other states’ crops fared worse: good-to-excellent ratings were 16% in Oklahoma (20% on Jan. 2), 20% in Colorado (25%), 36% in Nebraska (39%) and 31% in South Dakota (38%). Of the major production states, only the crop rating in drought-plagued Montana improved, up two percentage points to 14% good. 

A snowstorm moved through parts of hard red winter wheat country in late January, offering some protection from cold temperatures even if little soil moisture will be realized due to evaporation and wind. Analysts said dry conditions in the Plains remained a concern, though perhaps not a major one at this time.

“In the background behind the curtain is weather,” said Steve Freed, vice president, ADM Investor Services. “Meteorologist Drew Lerner still thinks this dry pattern in Kansas and across the hard red winter wheat areas is going to continue at least through February, and he doesn’t rule out through March-April. He sees a bigger than 50-50 chance US winter wheat areas are going to be dryer than normal. If in March the Pacific oscillators are negative, and La Niña is still around, that ridge in Kansas could move up to Iowa for the summer. So, he doesn’t feel that’s going to be that big of a deal. In other words, there won’t be another ridge in the east that marries with a ridge in the west and just shuts precipitation off.” 

Also, spring weather, especially rain, around the time plants emerge from dormancy is more vital to yields than dormancy conditions.

“The trade, as they’re bound to do each year, forgets that there’s not much precipitation in the winter months in the Plains states,” Mr. Lapp said. “But Moosejaw or Minot or Pueblo or Guymon, Okla., don’t get a lot of precipitation during the year anyway, and they’re driest during the winter months. There seems to be shock and awe in the market every year, but it’s really not a game changer. To me, you expect it to be dry, and if it’s not, that’s a bonus for the wheat crop. We’ll start worrying more about whether we have precipitation or not beginning probably March 1 in many of those areas.”

Competing with dry weather on the list of uncertainties vexing the wheat market is demand for flour amid a global pandemic passing the two-year mark.

“The third factor is the peripheral side, the demand side when it comes to the variant, what foodservice, grocery, retail sales look like going forward,” Mr. Harris said. “Are we going to get over the hump here as we get out of winter with omicron?”

Dining patterns shifted mightily during 2020. The following year, inflation became a factor consumers could not ignore.  

“The consumer is starting to pick at lower-priced products to try to make ends meet,” Mr. Freed said. “Are they going to give up chocolate, give up certain brand names to go to generic names? My grocery store parking lot is filled, but so is Aldi’s. And our community blog is filled basically every day with people who are essentially retired, wanting to know the cheapest place to go get food, because our grocery prices are up 50%.”

How do the above factors figure into a market that sent wheat futures soaring in the fourth quarter and generated a massive spike in the No. 2 hard red winter wheat basis Kansas City?  

“Basis market is probably near the low now,” Mr. Harris said. “We had the record run up to record highs. Using 12.2% protein as a proxy, I’ve never seen a basis market trade $4 over. It didn’t last long. The rail system seems to be straightening out now; that’s been a big help. Millers have also been able to get stuff in-house and further booked. We’ve basically come from a market that’s $3.90 over, back down to around $2.20 over now. I would see something between $1.75 to $2 over as the floor through the balance of the first quarter.”  

While another basis spike wasn’t outside the realm of possibility, Mr. Lapp said, “it seems like a lot of the concerns about cash are behind us, because we went to record basis levels in each of those markets. It seems like we’ve resolved that problem. If we get some precipitation, say late February through March, I think farmers will be relieved, that they’ll feel more comfortable selling what they might still have on hand.”

That volume is relatively little, Mr. Freed said. 

“The farmer, in the last (grain) stocks report, only owned 20% of the wheat stocks, so the basis doesn’t really do very much to move grain,” he said. “If you want to move grain, since it’s in commercial hands, you’re going to have to invert markets. So March should gain on the May, May should gain on the July, July should gain on the November 2023. Basis has slipped back a little bit, but I think you need to cover everything.”

Wheat futures declined relatively modestly for two sessions after last month’s reports, rallied nearly a dollar into late January before dropping back about 50ؚ¢ just as quickly. Where they go next, again, hinges on developments in Eastern Europe and in the skies above the US Southern Plains. July KC touched a contract high of $8.71½ on Nov. 24. Futures would quickly top that in the event of a major Russian incursion into Ukraine, Mr. Harris said. 

“If NATO and the pressure starts to become big enough, we start to see Russian troops backing off from the Ukraine border, then I think we re-test the January low, which is basically at $7.50,” he said. “My bias right now would be for lower wheat prices. We’ve started to see some moisture in the Plains. I think we’ve probably done a little bit of damage to the demand side of the equation via feed. I still think the export number that the USDA has plugged in is a little bit too high, maybe by about 25 million bus or so. 

“The macro side is not to be underestimated. Another reason not to get overly bearish the market, we would fundamentally say that a test of $7.50 would be likely, but we can’t lose sight of the fact that sustaining prices under that between now and 60 to 90 days out is going to be tough to do when you’ve got such a high level of inflationary tone in the marketplace, got crude oil the highest it’s been since 2014, you’ve got soybean and the oilseed complex surging, corn prices are at levels we haven’t seen in several months. Wheat isn’t going to be able to stand alone and work lower and consistently move lower with what’s going on in all of these outside markets.”

The analysts said last month’s reports had little effect on buying strategies for millers. From their perspective, the numbers were close to pre-report trade expectations, and it’s tough to fine-tune forward strategies amid so many labor and logistical challenges nearby. As for bakers, food manufacturers and other wheat flour customers, the reports did little to improve a tough forward landscape, but perhaps offered as some consolation a bump in carryout stocks from the December projection and in increased winter wheat acreage.

“That perhaps takes a little bit of pressure off how their budget process would work and what they’re figuring in for pricing for Q2 and Q3,” Mr. Harris said. “These guys are all on high alert, due to Russia-Ukraine and inflation in general. We’re already seeing once again some products are getting depleted on the grocery shelves, not so much on breadstuffs and grains, but other pieces of that. That’s something they don’t want to have to deal with again if there’s another run. The baker is pretty much resigned to the fact that, from an inflationary standpoint, the best we can hope for is some of the inflationary pressures will start to ease somewhere around late in the second quarter or into the third. Given what we know about the labor situation and logistics, and supply chain situation, it’s tough to think that prices wouldn’t stay elevated through Q2 at the retail level.”