KANSAS CITY — An unprecedented array of factors has disrupted agricultural, energy and financial markets, pushing many commodities to near record highs but sending equities spiraling downward. War, adverse weather, freight congestion, soaring fertilizer and energy prices and labor shortages on the heels of two years of COVID have markets in unprecedented territory and the world on edge amid fears of recession and food shortages.

Some equity indexes are in or near bear territory while crude oil has been trading above $100 per barrel, but it’s agricultural products, especially wheat, that may be most critical because of the direct impact on the food supply. Many have compared current markets to the 2007-09 period when drought in several key growing areas around the world, soaring crude oil prices and volatile financial markets caused widespread disruption that led to the “Great Recession.” But Russia’s invasion of Ukraine in late February added an unexpected wrinkle — war — not present in 2007-09 and revealed fragility in global markets already strained by COVID, with the threat of food shortages becoming more dire daily. Now another critical and unpredictable force in agricultural markets — weather — comes to the forefront during the summer with many crops needing good to ideal growing seasons to replenish tightening stocks.

Ukraine flag over a wheat field.“There’s more moving parts than I’ve ever had before, except maybe in the 1980s,” said Stephen Nicholson, global sector strategist – grain and oilseed, Rabo AgriFinance. Mr. Nicholson and other analysts contacted by Milling & Baking News expect grain, oilseed and product values to be well supported through 2022 and into 2023 due to a combination of strong demand for limited supplies, with one possible caveat that may cap prices — a deep recession that could curb demand.

Wheat market remains bullish

Fundamentally, nearly everything looks bullish to the wheat market, the analysts said.

The US Department of Agriculture in its May 12 Crop Production report issued the first survey-based winter wheat forecast for the 2022 US crop. Winter wheat production was forecast at 1,173,547,000 bus, down 103,818,000, or 8%, from 1,277,365,000 bus in 2021. The forecast was based on a harvested area projected at 24,499,000 acres, down 965,000 acres, or 4%, from 25,464,000 acres in 2021, and an average yield of 47.9 bus an acre, down from 50.2 bus in 2021.

Perhaps the report’s biggest surprise was the 2022 hard red winter wheat production forecast of 590,037,000 bus, down 21% from 749,489,000 bus in 2021, and well below the average of analysts’ pre-report expectations at 685 million bus. If realized, the harvested area in Texas would be the lowest on record.

“That kind of blew me away,” said Bill Lapp, president and owner, Advanced Economic Solutions. “I don’t think the USDA would make a bold prediction like that unless they had tangible evidence to support it. I wouldn’t refute that number, but it certainly stood out to me as a big hit for the market.”

The reasons behind the overall lower production figures were no mystery. The USDA’s appraisal of the May 17 US Drought Monitor indicated 66% of US winter wheat production was within an area experiencing drought, the vast majority of that area in hard red winter wheat country. Hit hardest by a lack of adequate moisture was wheat planted in western Kansas, eastern Colorado and the panhandles of Texas and Oklahoma. The area where those four states meet was entirely in extreme drought but had large pockets in the driest category, exceptional drought. US winter wheat abandonment overall could reach its highest level since 2002, and perhaps the highest on record in Texas and Oklahoma, the USDA said.

Scouts taking part in the Wheat Quality Council’s annual Hard Winter Wheat Tour in mid-May found wheat in the top-producing hard red winter state of Kansas in a variety of conditions. A combination of a warm, wet fall and a cold, dry spring had wheat plants rising only up to scouts’ knees, but in many cases already heading out. The state’s central and northern cropping districts mostly featured lush, green stands of wheat with kernels beginning to develop. As the tour progressed west and south, wheat stands grew more sparse and the extent of moisture starvation was evident in dusty fields in cracks up to 18 inches deep. Some southwest Kansas fields looked ready for abandonment. The tour forecast the Kansas crop at 261 million bus, 10 million bus below the USDA’s state estimate based on an average yield about the same as the USDA but fewer harvested acres.

The USDA forecast production decreases for most other winter wheat classes as well, including soft red winter wheat at 353,503,000 bus, down 2% from 360,689,000 bus in 2021 but 3,797,000 bus higher than the projection issued April 12 by a panel of soft wheat millers addressing the spring conference of the North American Millers’ Association. Hard white winter wheat production was forecast by the USDA at 15,690,000 bus, down 23% from 20,283,000 bus in 2021. However, soft white winter production was forecast at 214,317,000 bus, up 46% from the pest- and drought-plagued 146,904,000-bu crop in 2021.

In its May 12 World Agricultural Supply and Demand Estimates report, the USDA projected US 2023 all-wheat production at 1,729 million bus, up 83 million bus, or 5%, from 1,646 million bus in 2022. With survey-based winter wheat production at 1,174 million bus, that puts the burden of higher production on spring production to bring up the total. Production of all types of spring-planted wheat would need to be 555 million bus, up 51% from the drought-challenged crop of 2021. While that’s possible, it’s becoming less likely as planting conditions have been dire in the Upper Midwest.

The USDA in its Crop Progress report said spring wheat in the six spring wheat growing states was 49% planted as of May 22, well below 83% as the 2017-21 average for the date, with Minnesota at 11% planted versus 90% as the average and North Dakota, the top spring wheat growing state, at 27% versus 80% as the average.

The USDA in its May WASDE projected US wheat carryover on June 1, 2023, at 619 million bus, down 36 million bus from 655 million bus expected in the current year. World wheat production for 2022-23 was forecast at 774.83 million tonnes, down 4.46 million tonnes from the 2021-22 estimate.

“The problems in Europe are probably partially responsible for the recent strength in futures,” said Brian Harris, executive director and owner, Global Risk Management. “That would be a lower crop out of France and the continued inability of Ukraine to be able to move grain products out of the country. There’s talk that the UN is helping to try to find ways for Ukraine to get the 25 million tonnes out of the country over land. They may be able to do some good that way, but until those ports are reopened, it’s going to remain a dilemma for the world market.”

It’s a dilemma likely to stretch for years beyond any declaration of peace between Russia and Ukraine, he said.

“Between ports, elevators, railroads, processing facilities, there’s a couple years’ work in Ukraine to get things back up to speed,” Mr. Harris said. “Even if there was a ceasefire tomorrow, we’ve got a long row to hoe before we start feeling comfortable about the Black Sea region being able to ship what was considered normal pre-war.”

The world balance sheet reveals further complications, said Steve Freed, vice president of research at ADM Investor Services.

Scouts saw dry, cracked soil and poor stands in many western Kansas wheat fields during the Hard Winter Wheat Tour May 17-19.

“The global exporter wheat stocks-to-use ratio is almost record low, demand is probably the lowest it’s ever been for the third and fourth quarter of any year, so there is support underneath the market,” he said. “Canada probably won’t have as big a crop as USDA is saying. Ukraine is out of the market. If I’m an Egyptian needing to buy Russian wheat, I can’t get a letter of credit, can’t get a vessel. There are just so many sanctions against Russia right now that restrict some of their exports. And domestic flour prices in Russia are record high. And then China has COVID lockdowns, and its economy is slowing. It’s a major problem when the No. 1 buyer of energy, soybeans, vegetable oils, precious metals, and certain base metals is not buying. So that adds to the confusion of saying ‘demand’s going to be better than supply’ when the Chinese are backing away from buying.”

Wheat futures, in the wake of the USDA’s May reports, began to climb. On May 14, India announced it would ban most exports of wheat to limit food inflation domestically after a heat wave damaged the country’s crop during the key final maturation stages. That sent US wheat futures soaring, many contracts to their daily trading limit. The July KC future made a new contract and all-time high at $13.79¼ a bu. Futures retreated later that same week on speculative profit taking and unwinding of a heavy wheat/corn spread and by May 24 the market had given back $1.60 per bu, or nearly 12%, from the high. The corrective break was seen by analysts as a typical feature of a long-term bull market while the core fundamentals remain in place.

With wheat futures technically over-bought by every measure and bullish fundamentals intact, where do prices go in the third quarter?

“The Ukraine war isn’t ending quickly enough to say the ultimate top is in,” Mr. Harris said. “If I need coverage right now for Q4, I’d be targeting something between $12.10 and $12.25 (a bu) to finish out what I needed for the balance of the year. Beyond that, if the acreage is significantly higher, we could be looking at some Q1 coverage that falls back into the neighborhood of $11.25 to $11.50. Even the USDA numbers on prices reflect that mentality of firmness going forward. From a buyer’s perspective, something back down around $12.10 would be a good valuation for anything I had left to do for Q3 and Q4.”

Prices could soar even higher in the October-December period, Mr. Freed said.

“We have to figure out what happens if the US and Canadian crops are smaller, if Europe’s crop is smaller,” he said. “Black Sea exports are down. We’re closely watching Australia, where there’s been too much rain. What is the import buyer going to actually buy? The main thing is that nobody knows how high is high. To me, going into the fourth quarter, $13 Chicago wheat and $14 KC and Minneapolis wheat is too low.”

Mr. Lapp said tight supplies would have futures trading in a wide range.

“We’re going to stay elevated and volatile over the last half of the calendar year, so you can see both $11 and $15 as possibilities,” he said. “A wide range like that would be more common rather than unprecedented in a tight stocks year. A wide range is very possible.”

With no apparent break in wheat prices on the horizon, what strategies can bakers and other flour product users employ?

“Those that don’t have any coverage in the last half of the year, or 20% coverage at current price levels, then if that’s the high of the year, then, OK, you can buy the other 80%,” Mr. Freed said. “But you need something. Most people believe the basis levels will go up simply because of logistics. The railroads are trying their best to perform, but it’s not the best performance, or efficiency. With a smaller crop and rail logistical problems, the basis will just go up. So they have to deal with futures going up and the basis going up at the same time.”

The time for third-quarter coverage is now, Mr. Lapp said.

“The baker has got to get ahead of this and certainly should have Q3 covered, and if not, do it now,” he said. “Even into Q4, any kind of breaks we have. You might ordinarily look for prices to fall to a certain percentile or a gap to be filled in the futures, a 10% break in the market. Take advantage of down days, maybe a 5% down, which is a full 70¢. Got to take advantage of those and add coverage because just when we think this is over, it may not be.”

Mr. Harris also advised bakers to be cognizant of basis.

“Everybody’s so focused on the futures board right now, but what nobody’s talking about is that basis numbers are down around $2 a bu from the highest point,” he said. “That is very impactful on your bag cost or net mill cost, so make sure you’re focusing on all components. There is probably also going to be some good opportunities as these markets finally do start to peak to get your midds done for Q4 and looking into Q1. With grain prices this high, midds stay elevated, they’re not going to be up there forever.”

Soybean and corn prices soar

Conditions in the Upper Midwest delaying spring wheat planting progress also are delaying planting of corn, soybeans and other crops, giving that region an outsized impact on determining wheat, corn and soybean supplies and values in the year ahead. While corn and soybean planting was “catching up” nationally with the average pace in late May, cool and wet conditions have delayed planting of most crops in the Upper Midwest and parts of the Canadian Prairies. The USDA in its Crop Progress report said corn planting as of May 22 in the 18 largest-producing states was an aggregate 72% completed, modestly behind 79% as the 2017-21 average for the date but much better than just a couple weeks earlier. But planting in Minnesota was only 60% completed (86% as the average) and in North Dakota was just 20% completed (66% as the average). Corn emergence in the 18 states was at an aggregate 39% compared with 51% as the average. Emergence in Minnesota was at 24% (51% as the average) and in North Dakota was only 1% (21% as the average). Soybean planting in the top 18 states was 50% completed by May 22 compared with 55% as the average, with Minnesota at 32% (68% average) and North Dakota at 7% (47% average). Soybean emergence was at 21% in the 18 states (26% as the average) with Minnesota at 7% (22% average) and North Dakota at zero (8% average).

What farmers decide to do in the next few weeks in the Upper Midwest will be critical for all of the United States if not for the world.

Ukraine’s position as the world’s fourth largest exporter of corn certainly has played a role in rising corn values. Increased demand for biofuels, both ethanol from corn (and sugar in Brazil) and renewable diesel from soybean and other oils, also has been supportive of corn and soybean prices. And increased demand for biofuels largely has been fueled by crude oil prices pushed above $100 per barrel due to the loss of crude oil exports from Russia amid the Russia-Ukraine war.

“As long as ethanol is making 80¢ to 90¢ a bu (on corn) and biodiesel is making $2.50 to $3 a bu (on soybeans), producers will keep bidding for corn and soybeans into the end of the crop year,” said Dan Basse, president of Ag Resource Group, Chicago.

“We’re on the doorstep of a food crisis,” Mr. Basse said, noting increasingly tight grain supplies as one factor in a demand-driven market. He said May and June tend to be a period of lighter exports from the Black Sea region, but July may be when the world begins to feel the pressure. Most grain exports from the region had occurred prior to the war, so the full impact has yet to be felt as the new marketing year begins. Several analysts expressed great concern for crop production in 2023 as the impact of using less high-priced fertilizer may have a greater impact than in 2022.

Some analysts expect export demand for US grain and soybeans to be stronger in 2022-23 and above initial USDA projections in May. The USDA projected the US carryover of corn on Sept. 1, 2022, at 1,440 million bus and on Sept. 1, 2023, at 1,360 million bus. Soybean carryover on those same dates was forecast at 235 million bus and 310 million bus, respectively. Corn exports in 2021-22 were forecast at 2,500 million bus and in 2022-23 at 2,400 million bus, with soybean exports at 2,140 million bus this year and 2,200 million bus next year. Corn production in 2022 was projected at 14,460 million bus, down 4.3% from a record outturn of 15,115 million bus in 2021, and soybean output was forecast at a record 4,640 million bus in 2022-23, up 4.6% from 2021. The first survey-based US corn and soybean production forecasts won’t be issued until August.

In general, most analysts believe the USDA’s corn and soybean production and carryover forecasts are too high and export forecasts are too low.

“About 30% of the US corn crop and 40% of soybeans could be planted late,” Mr. Freed said. “We could see lower total corn acres as North Dakota farmers switch to wheat.”

He added that he expects the average US corn yield in 2022 to fall short of the USDA’s 177-bu-per-acre trendline forecast.

Mr. Freed expects US 2022 corn carryout at 1,300 million bus and 2023 carryout at 1,100 million bus, with corn exports in 2021-22 at 2,700 million bus and in 2022-23 at 2,800 million bus. He sees US 2022 soybean carryout at 190 million bus and 2023 at 200 million bus, with exports at 2,200 million bus in 2021-22 and at 2,300 million bus in 2022-23.

“Some feel the July corn future will struggle above $8.20 a bu unless there is a weather problem,” Mr. Freed said, adding that Russia’s denial of the United Nations’ proposal to allow a corridor for Ukraine exports was bullish for corn.

“Now that we traded over $17 for July soybeans, the next objective could be $18,” Mr. Freed said. “Cash soybean crush margins are record high. April combined US soybean use was a record 305 million bus, up 38% versus last year.”

Mr. Nicholson expects some seasonal pressure on corn and soybean prices around fall harvest, but also said it was “hard to see a downdraft in prices.” He expects nearby soybean prices to trade in the $14.50-to-$16-a-bu range, and maybe down to the $14-to-$15 range with a “really big crop.”

“There’s a good amount of corn in the world,” Mr. Nicholson said, “but we can’t afford any weather issues in the United States. There’s more upside in corn.”

He expects continued good demand for corn from the ethanol and feed sectors, as well as more robust exports in 2022-23. He noted that spring planting in Ukraine was better than expected, but questions remained as to whether the crop can be harvested, whether it can be exported and whether Ukraine has adequate storage if it can’t be shipped. He expects nearby corn prices to trade in a $5.75 to $7.50 a bu range, but mostly in a $6 to $7 a bu range.

“We know that $7 corn is too cheap and $14 soybeans are too cheap,” Mr. Basse said, again stressing price strength in a demand-driven market.

While soybeans aren’t a major focus of the Russia-Ukraine conflict, soybean values have been supported by surging prices for soybean oil and other edible oils, including sunflower seed oil, of which Ukraine is the world’s largest exporter, as well as surging demand for the manufacture of renewable diesel fuel. Soybeans currently are being crushed for their oil value instead of for meal, which is more typical.

“Soybeans have the best opportunity to grow out of a tight stocks situation if we have a good growing season,” said Arlan Suderman, chief commodities economist at StoneX. “Corn is the most desperate of the three crops.”

He expects corn to lose about 900,000 acres from the USDA’s March Prospective Plantings forecast of 89.5 million acres, and soybeans to gain about 400,000 acres from the March forecast of 91 million acres.

“If the (Upper Midwest) farmer isn’t committed on fertilizer,” they may switch to a crop other than corn, Mr. Suderman said, and some may take payouts for prevent-plant acres. The 2019 season showed corn can be planted late and still get good yields with an ideal growing season.

“If there is a good growing season, corn and soybeans may have their highs in,” Mr. Suderman said. “Where does the high pressure (weather system) set up this summer, east of the Rockies or west?”

At the same time, most analysts also agree that if weather turns hot and dry during the growing season, all bets were off.

“Keep the seatbelts and the helmets on, this is going to be a long summer,” Mr. Harris said. “This is unprecedented, the kind of markets we’re in right now and, it’s global, not domestic, as evidenced by India and Eastern Europe. Keep your eyes on the ball, and make sure you don’t get caught up looking regionally. It’s truly going to be an unprecedented summer for volatility.”