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US wheat futures fell 3.1% yesterday (22 July) as traders took profits, ending a nine-day rally of 14%, from $6.13 a bushel on 12 July to $7.01 on 21 July, the highest point since mid-May.

The most active wheat futures on the Chicago Board Of Trade were down 0.4% at $6.89 a bushel, having closed -2.6% down on Thursday.

The correction followed a disappointing exports report from the US Department of Agriculture (USDA) yesterday stating that cancellations, mainly from China, had outpaced new orders for US corn. The weekly orders total was the lowest seen since July 2012 and the second smallest on record.

Drought conditions will mean higher futures prices

However, the wheat market is being sustained by concerns about serious drought conditions in North America and the Black Sea growing regions affecting harvests and restricting supply. The two regions are the key suppliers to the global markets, and the effect of the current weather on their yields is a major problem. As one trader said: “We will get to know how big the problem is when the harvest starts.”

Trading was up on reports that expected output in Russia, the world’s largest exporter of wheat, was revised down to 82.3 million metric tons, from a previous forecast of 84.6 million metric tons, according to Russian grain consultancy Sovecon.

The US Department of Agriculture (USDA) too scaled back its estimates of Russian production in the 2021-22 marketing year from the June forecast of 86 million tons to 85 million metric tons.

USDA trims back wheat production estimates

In the US, the second largest producer of wheat, the USDA trimmed back its estimates of US wheat production this year, from a previous forecast for 1.9 billion bushels to 1.7 billion bushels. Winter wheat yield reports have been positive in some areas of the US but severe drought conditions in the Great Plains states have drastically reduced the expected US spring wheat output to a level last seen in 1988, with similar results across the border on the Canadian prairies.

The US durum wheat harvest is expected to collapse 46% on last year, becoming the smallest harvest in 60 years. The forecast rainfall in the US and Canada should provide some relief but traders will be closely tracking where the rain will fall and how much.

Weather is the critical factor in all agricultural commodities, but this year poor weather has combined with a recovering global economy to disrupt supplies. As Karl Setzer, commodity risk analyst with Agrivisor said on Reuters, even a small reduction in corn production could mean tight stocks and rising prices: “Pressure on crops is giving us some price support”, while any forecasts for rain in the US and Canadian growing regions may restrain wheat prices.

The expectations now are that wheat futures are set to continue their decline into next week, on signs of weak export demand, and by reports of rain arriving at a critical point in the harvest cycle.

However, with many of the key grain producers around the world unlikely to meet expected demand, the longer term outlook for prices remains positive, with grain prices dependent on yield reports as harvests come in. Trading Economics is expecting wheat to trade at $7.13 a bushel by the end of this quarter, and to trade at $8.25 a bushel in 12 months’ time.

A selection of Wheat ETFs

Product NameISINExchange TickerListing Currency
WisdomTree Wheat
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KY765WEATUSD
WisdomTree Wheat – EUR Daily Hedged
EQi
JE00B78NNK09EWATEUR
WisdomTree Wheat 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00BDD9QC84LWEAUSD
WisdomTree Wheat 3x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00BYQY81023WHLUSD

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

James Norris

James Norris

James is a highly experienced writer and editor, gained from more than 20 years in the financial services industry, in particular wealth management and asset management.

He initially worked as a financial journalist for a number of leading media brands, including the FT Group, Financial News, Euromoney and Incisive Media, covering most aspects of the asset management industry. More recently, James switched to work as an in-house content specialist for fund management and wealth management groups, including JP Morgan Asset Management, Quilter Cheviot Investment Management, AXA Investment Managers and Invesco Perpetual.

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