KANSAS CITY — Wheat futures’ summer of impressive gains tied to global supply concerns received yet another bounce in an August surprise. Market analysts interviewed by Milling & Baking News laid out paths by which futures could now dip lower into the fourth quarter and perhaps shoot higher in the early months of 2022.

Months of steady gains in spring wheat futures and an impressive upward tilt in winter wheat futures since mid-July received another big boost this month after a production curveball courtesy of the US Department of Agriculture. While leaving virtually unchanged its production projection for the drought-plagued US spring wheat crop, the USDA lowered its all-wheat and winter wheat production estimates by 3%. Much of the decrease was based on lower estimates for a hard red winter wheat crop.

In its August Crop Production report, the USDA projected US winter wheat production at 1,318,735,000 bus, down 3% from the July forecast but up 11% from 2020. The production of hard red winter wheat was forecast below analysts’ expectations at 776,855,000 bus, down 3% from the previous projection but up 18% from 658,640,000 bus in 2020.

Left unscathed was the top hard red winter wheat state of Kansas, where production was estimated by the USDA at 379,500,000 bus, unchanged from the July number but up 26% from 281,250,000 bus in 2020. Kansas yield was estimated unchanged from July at 55 bus an acre, but up 22% from 45 bus per acre in 2020. Drought-stressed Oregon, Washington, Idaho and Montana were behind the bulk of the production cut in the August report, while the hard red winter production states of Nebraska, Colorado and South Dakota saw smaller reductions.

Meanwhile, the USDA left virtually untouched its production projection for a US spring wheat crop that was approaching its harvest finish line. Enthusiasm over the rapid clip of its harvest was tempered by disappointment over the small size of the crop. Production of spring wheat other than durum in 2021 was forecast at 343,410,000 bus, down 0.3% from the July projection and down 41% from 585,990,000 bus in 2020. The forecast was within the range of analysts’ pre-report expectations. Some analysts felt the USDA may have taken a larger initial bite out of spring wheat production in its July report in consideration of the extensive moisture problems in the northern Plains.

“They whacked it pretty good in July, which surprised the market,” said Paul Meyers, vice president, commodity analysis, Foresight Commodity Services. “They surprised it the other way in August. What they saw last month was a crop that had been hurt substantially. There have been a few times in drought years when the USDA, rather than reflect damage over a couple months, went aggressive early, and it looks like that’s what they did here. Also, when they surveyed for August, there was nothing harvested there, so we don’t have that information to sort of true up the numbers.”

The USDA’s Sept. 30 Small Grains summary was expected to include harvest data that will be used to calculate the final estimate of the crop.

Wheat futures’ latest upward tear on Aug. 12-13 also was supported by the USDA’s forecast for lower domestic and global wheat carryouts. The carryover of US wheat on June 1, 2022, was forecast at 627 million bus, down 38 million bus from the July projection and down 217 million bus, or 26%, from 844 million bus in 2021. World wheat ending stocks in 2021-22 were pegged at 279.06 million tonnes, down 12.62 million tonnes from July and down 9.77 million tonnes, or 3%, from 288.83 million tonnes in 2020-21.

The lower global ending stocks forecast was partly due to lower production estimates for major US wheat competitors, Canada and Russia. The USDA forecast the 2021 Canadian crop at 24 million tonnes, down 7.5 million from the July projection. The Russian crop was forecast at 72.5 million tonnes, down 12.5 million tonnes from the July outlook. Those reductions more than offset an Australian crop that was forecast at 30 million tonnes, up 1.5 million tonnes from July.

“Going into the reports we heard flour people talk about how the crop is smaller, but had good quality, and that it will bake well,” said Steve Freed, vice president of research, ADM Investor Services. “But millers will have to change blends, using a little more hard red winter wheat, so that’s offering some strong resistance in the marketplace as far as hard red spring prices are concerned. The market has to decide what is the value of wheat based on the lower Russian crop, lower Canadian crop, overall lower US crop. We probably won’t get much export demand because of where our prices are compared with Europe and the Black Sea. But it’s still tight, and private estimates of our carryout are somewhere around 75 million fewer bus than what the USDA is using, mostly because imports to the United States might be lower than what the USDA is forecasting.

“Some of the buyers are in sticker shock as far as where prices could go. We just have to figure out whether some countries’ revenues are down due to COVID in places such as North Africa, and how much wheat they can buy at these higher prices. The corn market is now taking away from feed wheat here in the United States and globally. That might add a few wheat bushels to the bottom line, not milling bushels, but total bushels. Globally, we’ve had a rally in French MATIF futures, and all they may continue to set higher highs, which the US futures are tending to follow.”

In the near term, wheat futures may see a correction, if history is a guide.

“We could see KC wheat down around $7.10 to $7.15, and Chicago down around $7.25 to $7.30, partly reflecting profit-taking because the market has been going up so strongly in the last month or so,” Mr. Meyers said. “The USDA reflected a little bit that these high prices may reduce consumption somewhat. But we don’t get a lot of reduction in consumption because of higher prices on wheat. Flour is a staple in a lot of countries. Markets that go straight up like this tend to have at least a modest correction. And even at 40¢ to 50¢, a correction would be only 6% to 7% from the highs. Funds still seem to be reluctant to liquidate very much.

“We could get Minneapolis December falling under $9, maybe even to $8.80. Part of that is we rocketed higher without any kind of correction, and with these high prices, we might see more harvest selling than normal, which might back it off some. Going forward into the first quarter, most of the time we’ll be looking at $9 to $9.40 a bu for spring wheat futures because of the combination of small crops in the United States and Canada. Two of the major spring wheat producers have had disastrous crops, so prices will stay supported because of that. There’ll be some substitution where users can. But, in addition to a potential 120-million-bu decline in the carryover of spring wheat, the hard red winter wheat carryover is 80 million bus below a year ago.”

Mr. Freed saw even more upside potential for Minneapolis first-quarter futures.

“In the December-February time frame, which is the March contract, we would not rule out $8 Chicago and Kansas City wheat prices, which might put Minneapolis at $10,” Mr. Freed said. “A lot of it has to do with what the price of corn is, and where will soybeans be? Everything is kind of linked together now after the USDA reports. We’ll closely watch the September report. The market was surprised that the farmer wasn’t more optimistic about corn and soybean yields. If August is dry like it was last year, we probably won’t see the kind of increase that the market needs as far as yield is concerned. Last year, we went from a 181-bu-per-acre corn yield in August to 172 bus in the final, and from a 53-bu-per-acre soybean yield in August to 50 bus per acre in the final. This year we’re starting below that. We have to watch what China does. They are not a major buyer of wheat, but if they bought corn, wheat would have to stay at a premium to corn. The path of least resistance is putting some kind of supply premium into the marketplace, so $8 is possible for Chicago and KC and higher for Minneapolis. “

Farmers in the northern tier of hard red winter wheat country were wrapping up the last bits of the 2021 harvest last week. Early next month, after the Hessian fly date has passed, growers in the southern and central Plains will begin to seed the 2022 winter wheat crop, one expected to cover more acres than the 2021 crop.

“I’m fairly certain we’ll get more wheat acres, and total planted area will be up a little more than 2 million acres to about 49 million acres,” Mr. Meyers said. “Of that total, there will be about a million more acres of spring wheat and a million more acres of hard red winter wheat due to high prices and particularly the big spring wheat runup. Soft red winter acres may not change much. Maybe we’ll pick up 300,000 white wheat acres. Overall, up two million acres. Why not more? New crop corn and soybean prices for 2022 are also very strong. Farmers trying to decide, given all three, they’d like to increase all of them. They won’t be able to, obviously. Even cotton is over 90¢ a bu, so it’s not just one crop that has significantly higher prices. Prices are higher across the board.”

Mr. Freed agreed at least two million more acres may be seeded to wheat for harvest in 2022 but noted the variability of weather and tight carryover supplies will play a role.

“Right now, we have one analyst that has next year’s US all-wheat crop at 1,925 million bus and a carryout of 430 million bus, so, that’s pretty tight,” Mr. Freed said. “It’s not just how many acres. It’s weather-related, and we’re starting out with such a low supply. It’s hard to make that up overnight. Hopefully next year the Black Sea region, Europe, Canada, South America and Australia all have good crops, and we can get back to normal prices. Right now, we’re starting out behind the eight ball.

“The big thing right now is 90% of our trade is done by algorithm machines, and they trade headlines. I can say fundamentally we should go here, but if the dollar goes up, if the Fed decides not to taper, if we have a rocky relationship with China, things could be different. If next year is a better year for crops in the Midwest than in South America, the Black Sea, then we probably are near the highs. It’s going to be very volatile trade with a lot of moving parts. We could see everything. We could go from $8 to $5 in 30 days.

“The millers and farmers are under a lot of pressure. Not just the wheat price, but also because of higher labor costs. Some bakers are saying they only have half of the personnel that they need on their baking floors. Truckers are demanding higher per-hour wages, and drivers are limited on how much they can drive per day. Everything is happening at the same time. That’s hurting their market, so if I say wheat is going to $8 a bu, that doesn’t help.”