WASHINGTON, D.C., U.S. — Wheat futures earlier this month surged above recent highs set in May in Kansas City and Chicago and seemed poised to do so in Minneapolis spring wheat futures. While the rally that erupted in early July has been breathtaking, so, too, was the break in wheat futures from May highs to early-July lows that preceded it. The wild swings in fortune in the wheat market were tied to weather-related shifts in the U.S. and world wheat supply-and-demand outlooks for 2018-19, according to market analysts interviewed by Milling & Baking News, a sister publication of World Grain, on Aug. 6.

September wheat futures posted recent highs during trading on May 29. From its May 29 high of $5.92¾ a bushel, the K.C. September future plunged 122¢ a bushel to set a new recent low of $4.70¾ on July 2 but then soared 128¢ a bushel to set a new recent high of $5.98¾ on Aug. 7. From its May 29 high of $5.70¾ a bushel, the Chicago wheat September future dropped 99¼¢ a bushel to set a new recent low at $4.71¼ a bushel on July 11 and then surged 121¾¢ a bushel to a new recent high of $5.93 a bushel on Aug. 2. From its May 29 high of $6.54½ a bushel, the Minneapolis September future plunged 130¾¢ a bushel to set a contract low at $5.23¾ a bushel on July 12 but rebounded 115¼¢ to set a high for the move at $6.39 on Aug. 7.         

Paul Meyers, chief agricultural economist, Foresight Commodity Services, Inc., attributed the sharp decline in wheat futures, especially after the Sosland Purchasing Seminar (June 3-5) and continuing into early July, to a combination of factors. Most important was the excellent start to the spring wheat growing season in both the United States and Canada, resulting in historically high condition ratings for the U.S. crop. Also, there were indications that the hard red winter wheat crop, despite drought in Texas, Oklahoma and parts of Kansas, was a bit larger than the market had expected.

Meyers added that while fall crop planting got off to a slow start because of cold, wet spring conditions, once the crops were planted, they progressed rapidly, and their condition initially was rated historically high by the U.S. Department of Agriculture.

The tariff war between the United States and China began June 1, which pressured soybean futures, the principal agricultural target of the higher Chinese tariffs. The weakness in the soybean market exerted a downward pull on wheat. But in the U.S. and world wheat market, weather, not trade disputes, has been the key.

As recently as July 16, the USDA rated the condition of the spring wheat crop at 80% good to excellent. Ratings since have declined but remained historically strong at 74% good to excellent as of Aug. 6.

The USDA on July 12, based on a survey of producers, forecast the average yield of spring wheat other than durum in 2018 at a record 47.6 bushels per acre. Minneapolis wheat futures set new contract lows that day, and Chicago and Kansas City futures tested their lows set earlier in the month.

Then the market turned. There had been early warning signs. Already in June, the USDA lowered its forecast for world wheat production in 2018-19 by 3 million tonnes, to 744.69 million tonnes, compared with a record 758.22 million tonnes in 2017-18, because of emerging drought conditions in parts of Russia. In its July World Agricultural Supply and Demand Estimates issued July 12, the USDA further reduced its forecast for 2018-19 world wheat production by 8.43 million tonnes, to 736.26 million tonnes. In that report, the USDA lowered its forecast once again for Russia, but weather concerns were extended to the European Union, Ukraine and Australia, whose crop forecasts also were lowered.

The USDA will update its U.S. and world wheat forecasts for 2018-19 on Aug. 10, and further production reductions were expected. In the meantime, the International Grains Council on July 26 lowered its forecast for world wheat production in 2018-19 to 721 million tonnes.

“We have gone from a market in June that saw a better U.S. crop and not a lot of export demand, to now we’re talking about some of the world’s largest wheat buyers having to come to the United States for supply,” said Steve Freed, vice-president, ADM Investor Services, Chicago.

Meyers agreed, saying, “The world wheat supply situation is tightening more than what the market was expecting. Importing countries that normally would have been importing from the European Union or Russia will have to come to the United States, so this year’s U.S. wheat carryover (forecast at 975 million bus by the USDA in July) could end up a hundred million bus or more lower.”

Freed said a factor to which traders should pay particular attention is the tightening ending stocks-to-use ratio in the major foreign wheat-exporting countries. He suggested with adjustments expected in the August WASDE, the ratio could be record low, at about 18% to 19%.

As crop prospects in other major wheat exporting countries were trimmed, a tour of the northern Plains hard red spring wheat crop organized by the Wheat Quality Council and conducted July 23-26 “found a North Dakota crop that was much smaller than what the market was expecting,” Meyers noted. The tour forecast for the average spring wheat yield was 41.1 bushels per acre versus the USDA’s initial forecasts at 47.6 bushels per acre. The sobering assessment of the spring wheat crop’s potential gave a further impetus to what had developed into a full-blown rally in wheat futures.

On Aug. 2, wheat futures spiked on ideas Ukraine planned to restrict milling wheat exports. A spokesman for the Ukrainian agriculture ministry quickly asserted there was no plan to limit exports, and futures drew back from their session highs. But the rumor and the market’s reaction revealed just how combustible wheat futures have become.

Both Russian and Ukrainian governments have proved willing to intervene in the wheat market should they deem it necessary. Russia and Ukraine halted wheat exports in 2010-11 because of crop shortfalls in 2010. And restrictions in the form of higher export taxes have been imposed from time to time.

Meyers pointed to recent estimates suggesting the Ukraine crop might in fact be larger than the market was expecting.

“If the crop is larger, Ukraine is unlikely to restrict exports,” he said. “At any rate, I would say a full-blown restriction on exports is unlikely. The same is true for Russia, whose crop is smaller than last year but not a disaster as when they last halted exports (2010-11). And even Russia found out it’s hard to win back customers when you halt exports and cancel signed contracts.”

Meyers said to remain the world’s largest wheat exporter, it was important for Russia to maintain a reputation for being a reliable supplier.

Freed pointed out some analysts believed wheat futures may continue to rise.

“Funds are now long 43,000 contracts in Chicago wheat futures,” he said. “Their record long is 81,000 contracts, so there is room to increase their long positions.”

But much will hinge on harvest results across the Northern Hemisphere.

“I believe that what happens in Russia is the most important driver for our wheat futures,” Freed added. If there were no drought in Russia, wheat futures would not have climbed to their current levels.

A question the market will have to grapple with is whether it may have overreacted to the upside in the current rally, but that won’t become evident until harvest results are in, Meyers agreed. He added even if the 2019 U.S. wheat carryover forecast were to be reduced to around 850 million bushels, that would reflect a still ample supply and not seem to justify futures approaching $6 a bushel (basis Kansas City and Chicago wheat futures).

Looking ahead, the wheat futures rally combined with the trade war with China may encourage producers to plant more wheat acres and fewer soybean acres for harvest next year, Freed and Meyers said. Winter wheat planting typically begins in September.