KANSAS CITY, MISSOURI, US — A handful of wheat wild cards in play — including crop development weather, pandemic-propelled consumer trends, export disruption in the Pacific Northwest, and the vagaries of Russian wheat exports — could steer price direction as the calendar flips to 2022. Market analysts interviewed by Milling & Baking News, a sister publication of World Grain, suggested wheat prices could ease in what may be an overbought market before rallying into the first quarter and advised bakers to “buy the breaks” and cover about 30 to 45 days’ worth of flour while volatility continues.   

The US Department of Agriculture in its November World Agricultural Supply and Demand Estimates report issued Nov. 9 forecast the carryover of wheat on June 1, 2022, at 583 million bushels, up 3 million bushels from the October projection but down 262 million bushels, or 31%, from 845 million bushels in 2021. It would be the smallest wheat carryover since 306 million bushels in 2008. The recent five-year average wheat carryover was 1.047 billion bushels.

The USDA forecast the 2021-22 wheat supply at 2.606 billion bushels, down 10 million bushels from October and down 12% from 2.957 billion bushels in 2020-21. The lower supply forecast reflected a 10-million-bushel decrease in forecast imports to 115 million bushels.

By class, imports of hard red spring wheat were lowered 5 million bushels, to 55 million bushels, and the durum import forecast was lowered 5 million bushels, to 46 million bushels.

Globally, the wheat outlook was for reduced supplies, slightly higher consumption, increased trade, and lower ending stocks, the USDA said.  Global supplies were projected down 1 million tonnes from October to 1.063.2 billion based on decreases in beginning stocks — down 410,000 tonnes from October to 287.95 million tonnes, and production, down 590,000 tonnes from October to 775.28 million tonnes.

Milling & Baking News asked Paul Meyers, vice president, commodity analysis, Foresight Commodity Services, and Steve Freed, vice president of research, ADM Investor Services, whether there were any surprises in the USDA’s latest supply-demand assessment, how the corn market has affected the wheat market, what propelled wheat futures to fresh contract and multi-year highs in November, and whether that rally could continue into the new year.

The USDA attributed its 15-million-bushel reduction in projected wheat exports largely to hard red spring and white wheat due to “high domestic prices and muted export sales.” Meyers suggested that perhaps the trim didn’t go far enough as he projected 2021-22 US wheat exports at 850 million bushels. 

 “In recent months, that world wheat carryover number has been edging down, and now we’re 12 million tonnes below a year earlier,” Meyers observed. “That’s the number the market looked at, even though it wasn’t a big change, and it has generated this idea that the world wheat supply-demand situation continues to tighten.”

Freed said US prices weren’t competitive for the uptick in wheat exports until January, citing 13.7 million committed versus 17 million a year ago.

“If Russia’s out of the market Jan. 1, our exports are going to be bigger, or at least at the government’s 860 million, which means that the carryout stays around 580 million or a little bit less,” he said. “Another thing that wheat must factor in, is the rail line in Canada that was washed out. Wheat exports to Vancouver stopped. Probably won’t be available for at least three months while they fix it. So does that mean that Canada dumps wheat into the US markets with our market as high as we are?”

Ideas of tight world supplies, among other factors, propelled US wheat futures up to contract and multi-year highs in November.

“The main factor is the perception, based in part on what the data shows, that world wheat stocks are coming down, particularly of the higher-protein wheats, hard red winter and hard red spring,” Meyers said. “At the same time, the import demand by a number of countries continues to be pretty strong, and at these high prices, it doesn’t appear that they’ve cut back very much on the purchases. For example, in the last few days, Algeria tendered, and they bought supposedly 800,000 tonnes, and prices this week are high as they’ve ever been.”

From Freed’s perspective, increased world trade and record-low global stocks-to-use ratios were factors in wheat’s remarkable rally.

“It’s three things: No. 1, USDA in their global report raised world trade, and they had to show that all major exporters’ combined global ending stocks-to-use ratio is record low,” he said. “Second, most global wheat buyers are hand-to-mouth. The Egyptian tender was one cargo for November-December. They paid $7 per tonne more than they did in the previous tender, and that’s with $45-a-tonne cheaper freight. Egypt has no coverage for 2022. 

“Third, the Russian export tax today is $80 per tonne. If you look at their January price, the tax is $100. So, one of two things will have to happen. Prices are going to have to rally to stop this global demand, or the United States is going to get some business out of it. If the United States gets business out of it, with carryout stocks as low as we are, it just has to rally. It’s one thing to say we have a 583-million-bushel carryout, but what if we get 100 million bushels of demand that we don’t have plugged in and Russia’s out of the market?”

Meanwhile, the rally in wheat futures pulled corn futures prices higher even as the US corn crop has turned out larger than trade estimates. High wheat prices compelled some commercial buyers to switch to corn, so corn prices are leaning on wheat, Meyers said.

“I have a harder time explaining why corn futures are this high given the carryover,” he said. “Typically, carryover relative to usage is a little over 10%, but you normally don’t get prices approaching $6 futures. Looking forward, you have the possibility of La Niña affecting weather in Argentina and southern Brazil, although rainfall has been very helpful to planting in Argentina. There’s dryness in southern Brazil, but you’ve got a likely record-high South American corn crop, record South American soybean crop, and coupled with the US corn carryover, it seems like we’ve built in a big weather premium.”

Analysts were split on the possibility wheat futures could rally further into January 2022 and beyond.  Meyers said new highs were possible, but not the most likely scenario since prices already soared to levels that they may not have reached on fundamentals alone.

“Short term, we may have seen the highs and we may give back a bit,” Meyers said. “US export commitments remain below a year ago, down around 20%, so this idea that some of these countries that may restrict or haven’t been exporting as much, some of that demand is going to come to the United States. The market’s been talking about that for a few weeks, but the evidence isn’t strong that that is happening. We go weeks and still don’t see a pickup in US export business, that’s another reason why I think we can sell this market off some.”

Freed indicated certain weather scenarios have the potential to extend wheat futures’ rallies. He referenced a “good news, bad news” weather outlook from Drew Lerner, a senior agricultural meteorologist with World Weather Inc. 

Lerner “sees a ridge developing in Nebraska, southern Iowa, Kansas and Nebraska in the spring that will amplify east to the Mississippi river and south as we get into the summer, and if the Pacific decadal oscillation remains negative and the La Niña is still around, that will amplify north into the northern Plains,” Freed said. Plus “he has a Bermuda high that will keep the South dry this winter. And he sees a slight chance that Bermuda high could move west and merge with the other ridge. Something like we had in 1988. So, to me, if he’s right, we are a long way away from the highs.” 

Meyers said futures could pull back in the near-term.

“KC March is $8.32 today, I’d say we’ll get back to around say $7.70 to 7.75 area, same thing for Chicago,” he said. “Minneapolis March, which is $10.20, probably will decline to around $9.75 or so. A fairly good drop from where we’re at now, and part of that is based on the fact this rally has been overdone, given what we know about world wheat supplies.”

Freed noted the July 2022 wheat contract had gone straight up since establishing lows back in May 2020. 

“We’ve had a couple of glitches, but since August of 2020, we’ve never traded below the 200-day moving average that comes in around $6.87, and we traded above all the moving averages,” he said. “The market probably is overbought. There were new contract highs today, now we’re backing off from those prices, but again, $9 wheat is a strong possibility, just on what we know today. We seem like we broke out because of what’s going on in Russia and world prices and world stocks, above $8. So, it’s kind of a wide range, $8 to $9, but $8.50 is a price in which we could get as far as a median prices, and then try to stay within that range. 

“So I don’t have any problems with Chicago wheat in this $8 to $9 type range. Kansas City is demanding a little bit of a premium right now, but it’s had the same chart pattern and it has probably the same range, $8 to $9. Now, spring wheat basis has gone straight south. And the basis made the market back off from $10.86 to a recent low of $10. And I think people are figuring out a way domestically to make flour without 60% of it being spring wheat. And I think consumers have gotten ready for that. And Dec. 3, the Canadians might lower their wheat crop again. It’s raining in Australia, the quality stinks, and it’s dry in Argentina. So there’s nothing to keep these markets away from making new highs. $10-11 spring wheat is probably a good number. Obviously, the buyer wants it to go down, and the speculator thinks it’s going to go up because of inflation.” 

The message to bakers and other flour users was to “buy the breaks,” Freed said. 

“Coverage is only 50% right now for the first quarter and 20% for the second quarter, and that is too low,” he said. “I don’t think the basis breaks. They’ll get a little help from higher corn prices, as far as millfeed is concerned. Easily, propane, diesel gas, any energy cost is going to go up at least 100% in the wintertime and early spring. They’re going to have to raise wages. Everything on the expense side is going to go up. So, the ones that make money are the ones that can pass on prices to the consumer.”

Meyers said volatility should limit flour coverage extensions for now.

“From today’s price, $8.30 KC, bout the same for Chicago, if you get back around $8, I’d be looking to buy about 30 to 45 days of coverage in January-March and then target another 15¢ to 20¢ down to fill out first quarter,” he said. “Hopefully we’ll get that kind of correction by mid-December. The reason I wouldn’t go the whole quarter or even into the second, these are lofty prices and still very volatile to where you don’t want to get locked in and have prices collapse. And when prices are this high, the odds are greater of that happening.”

Amid all this is the uncertainty of just how much consumer use of flour may have shifted permanently nearly two years into the pandemic, a feature not lost on bakers, Freed said.

“Bakers I’ve talked to said No. 1, for the first time in 25 years, everything that they buy has gone up,” he said. And No. 2, they have a jobs shortage. Their baking floors are about half-staffed. And they really don’t know what demand’s going to be. Some of the trends are just unbelievable how they’ve switched. If bakers keep raising prices, is that going to stop demand? If we have another uptick in COVID, does that shift demand, or do we go back to staying at home and buying groceries?”