Will weather push wheat prices higher?

by Drew Lerner
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Most of the grain and oilseed markets continue to closely monitor Brazil and Argentina production as their harvest season’s move into high gear. Concern over Brazil’s trucking strike combined with a wet weather bias in February brought around a little support for soybean prices. In the meantime, a few interesting issues seem to be evolving for wheat production around the world that will be closely monitored – at least for a little while. The big question is whether world weather can be adverse enough this spring and summer to support stronger wheat prices.

Conditions in winter wheat around the world are quite varied. Both China and India are poised to bring in large crops. Weather in China this winter has been almost perfect after autumn planting went extremely well. Winter provided virtually no harsh weather in wheat production areas and there have been several important precipitation events that have put some moisture into the ground for use in the spring season. Wheat will break dormancy in a part of eastern China this month and it is expected to be supported by timely rainfall.

The good start to China wheat development will be closely monitored because there is an association with “Modoki” El Niño events, like that developing this year, and dryness in a part of southeastern and east-central China during the spring season. A Modoki El Niño event is defined as being a large region of unusually warm ocean water that is located along the equator near the International Dateline in the central Pacific Ocean. El Niño events of this type are different from the traditional El Niño events that produce the warmest equatorial sea surface ocean water between the South America coast and 160 degrees west longitude. A Modoki El Niño event places the warmest ocean water further to the west and in doing so it causes high pressure to form east of the Philippines that grows in size during the spring season and tends to reduce rainfall over east-central and southeastern China.

The effects of Modoki El Niño events can change China’s favorable weather pattern today to one of greater concern in April and May when wheat is moving toward and into reproduction. Quite often the driest anomaly in a Modoki El Niño event tends to occur a little further south in China than the primary wheat production region, but this potential development will raise a need to watch what happens in the next few weeks. Dryness could impact other spring planting and crop development in China besides wheat.

In addition of the Modoki El Niño event there is “some” lingering drought in Inner Mongolia, Liaoning, Hebei and North Korea left over from last summer. Some of the dryness has recently been eased, but there is potential that with the El Niño phenomenon around that the dryness in northeastern China could return and expand into the region that is disfavored for rain in east-central and southeastern China because of Modoki El Niño. This is wildly speculative, but still a possibility.

India’s wheat crop is already reproducing and filling. Rain the last days of February and early March will prove timely enough to support very good production potentials and there is not enough time left for that crop to run into problems.

In the meantime, the returning El Niño conditions in the Pacific Ocean raises interest in Australian rainfall. Traditional El Niño events tend to cause dryness during the late winter and spring in eastern Australia, but Modoki El Niño events tend to create dryness in northern Australia and more in the summer than in the spring. Modoki events would have less impact on winter wheat, barley and canola production than traditional El Niño events and that reduces the odds of Australia having serious drought again in 2015, although much can still change.

Potential Problem Areas

There is already a smaller crop of wheat in the making for Russia, Ukraine and the United States because of problems with bitter cold weather coming sooner than usual and poor snow cover. The trouble in Ukraine, southwestern Russia and immediate neighboring areas began during the planting season last autumn when rainfall was far below normal. Wheat and rye failed to establish well and bitter cold conditions showed up early in the autumn before snow was on the ground, raising potential for winterkill. There have been frequent bouts of threatening cold without much snow on the ground this year in Ukraine and southwestern Russia and that in combination with poor emergence and establishment because of dryness last autumn suggests there may be some significant losses in spring production.

Both the Russians and Ukrainians are aware of the potential problem with 2015 winter crop production, and that is why there has been some impressive moves to reduce wheat exports until the spring when damage assessments can be made.

A similar situation has occurred in the United States where soft wheat in the Midwest did not all get planted because of too much rain delaying the summer grain and oilseed harvest last autumn. Some of the crop was not planted and that which was planted may not have established well before bitter cold air evolved in November. Some of that bitter cold air occurred without adequate snow cover and there have been additional bouts of bitter cold this year with limited snow cover at times in a part of the region. Just like in Russia and Ukraine, there is some potential for a smaller U.S. crop because of these conditions. The situation in the United States is far less significant than that in Ukraine and Russia.

Some damage may have also occurred periodically this winter in both the minor wheat areas in the northern U.S. Plains, the central U.S. Plains hard red winter wheat region and in a few Canadian Prairies crop regions. These pockets of possible damage could add up, possibly giving a little boost to wheat production issues a little later in the spring.

Canada’s primary winter wheat production region is in Ontario and Quebec. Most of those crops were planted successfully and were adequately established before winter hit. But there is some concern over spring wheat production areas in the southern Prairies and northern U.S. Plains. World Weather, Inc. has placed those areas into a summer drought watch because of the potential that dryness will continue deep into spring and then temperatures will suddenly turn much warmer, sending evaporation rates higher at a time when soil moisture may be restricted.

In other areas around the world, there is some concern of wheat production issues in Europe because of too much moisture at planting time and during a large part of winter. Some spring flooding this year could reduce some production, although it is not likely to be a huge factor. Spain still has some need for greater rain, but it is the only large wheat production region that has not seen surplus to excessive moisture this year.

North Africa durum wheat production in 2015 is expected to be quite favorable, but much will be determined by March and April rainfall since that is when most crops will approach and enter reproduction.

The bottom line is with the wheat commodity futures prices recently putting in a bottom and a few unknowns regarding winterkill and potential issues in China and Canada this spring, there might be just enough worry to support a little bounce in futures prices over the next few weeks. But, World Weather, Inc. would be surprised to see production cuts anywhere near those of 2007 and, of course, today’s world wheat stocks are much greater than those in the middle to late 2000s to prevent a raging bull of rising prices.