26 Aug 2021

Over the past few weeks, wheat has become the leading ag commodity. Prices recently rose to multi-year highs, before tapering-off in the last week or so, as strong resistance levels are tested. Why the sudden spike in prices? a huge downwards shift in the global production and quality outlook. Apart from Ukraine and Romania, all of the major production areas have seen significant downgrades in both yields and quality.

Less than a month ago, global analysts were expecting a global bumper wheat crops. But drought conditions in US and Canada, combined with very wet harvest conditions in Northern Europe and hectic weather in Russia led to lower yields and reduced quality. 

It came as a swift surprise and traders are now caught in a trap. Prior to harvest, European exporters had sold significant volumes of milling wheat, in the belief that appropriate supplies would readily be available. They were wrong and must now deal with the consequences. Exporters are being forced to look eastwards to cover their pre-harvest, optional-origin sales. 

Short traders are on the back-foot and so the strength in the market now lies in the farmer’s hands. This is a seller’s market, on a global level.

As the UK harvest progresses, we now know that supplies of milling wheat will be in short supply  here too and thus well valued throughout 2021 and 2022. 

Restocking from Southern hemisphere crops may be more limited than expected, should La Niña manifest itself again. Although Australia is expected to have another very good year, concerns are rising for Brazil and Argentina, where a potential La Niña could exacerbate drought conditions. We see scope for production losses here, if dryness continues.

Risks seem skewed to the upside for wheat prices, with a potential for global production and export estimates to fall further, amid strong demand, that could continue to shrink ending stocks.  

Sébastien Mallet