The week began with significant rises in wheat futures contracts. In a market that is extremely short on contracts traded in Chicago, bullish fundamentals can be boosted by moves to "cover" these short positions - and the headlines coming out of Russia seem to have succeeded in starting this movement.
In this report, we'll look at one of the main reasons behind the recent rise: the production estimate cuts for Russia's 24/25 harvest.
Fig. 1: Speculative funds positioning HRW wheat (thousand lots)
Just as we did in our monthly call last Thursday (18th), Sovecon - a consultancy specialized in the Russian market - also reduced its estimate of Russian wheat production by 1M mt to 93M mt. This was the first reduction in the current cycle, due to deteriorating crop conditions in the south of the country.
Fig. 2: Production, domestic use and exportable surplus - Wheat Russia (M ton)
Source: USDA. *Hedgepoint estimate
Southern Russia is the country's largest wheat-producing region, accounting for more than 40% of the total crop. The main reason for the revised estimate is the dry weather conditions in southern Russia.
Over the last 30 days, humidity levels in the region have been between 60 and 80% of normal, with minimum temperatures 2 to 4°C above average. Due to the lack of precipitation, a moisture deficit is forming in the topsoil, and crop conditions have worsened.
SovEcon estimates that harvest conditions is average/slightly above average in Rostov and Krasnodar (Russia's two largest wheat producers) and slightly below average in Stavropol (the third largest).
Fig. 3: Precipitation observed in the last 60 days (% of normal) - Russia
Fig. 4: Soil moisture - southern Russia (% within the top 1 meter)
In the coming weeks, the main weather models predict 60-90% of normal rainfall in the South, which, combined with high temperatures (2-4°C above normal), will probably not significantly improve the availability of moisture for plants in the region.
If the South doesn't receive significant rainfall in the next 2-4 weeks, the region could face a crop failure. However, this could be partially offset by relatively high yields in the Volga region and the Center, where harvest conditions still look better than average.
The weather is also becoming a concern for the country's spring crop, which is due to start being planted next month. Siberia, the main spring wheat producing region, is experiencing soil moisture below the minimums of the last 5 years.
Fig. 5: Rainfall forecast for the next 15 days - Russia (% of normal)
Fig. 6: Soil moisture in Siberia - Russia (% within the top 1 meter)
The headlines coming out of Russia brought significant upward pressure to wheat contracts this week. In addition to the attacks on Ukrainian port infrastructure - which add risks to the transit of grain on the Black Sea - the market began to worry about the deteriorating conditions of the Russian crop.
Despite the still limited impact on production estimates, there is still room for a significant deterioration in the Russian crop if the weather continues to be negative for productivity. The winter crop won't be harvested until July, and the spring crop will be planted next month. As a result, the harvest in Russia, the main global wheat exporter, could still provide significant support for wheat prices in the coming months.
Fig. 7: Black Sea wheat exports (M ton)
