Wheat: American harvest starts the year with low indicators

It's been a few years since the United States has had a really good winter wheat crop, but the 24/25 harvest has started bringing hope that this year should be different. And the data released last week by the USDA continued to point in that direction. Check out the full Hedgepoint Global Markets analysis.

Report shows good conditions, especially for HRW

The USDA released its latest winter wheat crop ratings for the season on Nov. 27, reporting that 50% of the U.S. crop was in good to excellent condition, the highest for this time of year in four years. During the winter, the USDA's National Agricultural Statistics Service releases monthly reports for some states. The government resumes weekly reports on U.S. crop progress in April.

“In its monthly crop report, the USDA showed that winter wheat condition ratings improved in December in Kansas, the largest U.S. winter wheat producer, as drought eased across much of the Southern Plains, although Ratings have fallen in other states, including Montana and Colorado. The USDA rated 43% of Kansas' winter wheat crop in good to excellent condition as of Dec. 31, up from 32% in late November. Wheat ratings also improved in December in Oklahoma, Texas and South Dakota”, says Alef Dias, Grains & Oilseeds and Macroeconomics analyst at the company.

The improved conditions reflected a large precipitation event that drenched Kansas from December 13 to 15. Temperatures in the 30s (F) range meant freezing rain at times, especially early in the storm, which also included snow, Kansas State University's agronomy department said in a late December update.

Nationally, 30% of the winter wheat crop was in a drought area as of Dec. 26, the USDA reported last week, down from 32% the previous week and a significant drop from 69% the previous year.

“Farmers in the Plains states grow hard red winter wheat (HRW), the largest class of wheat in the U.S., which is milled to produce bread flour. Ratings fell in Illinois, where farmers grow soft red winter wheat (SRW), used to make cookies and snacks. The USDA classified 55% of the Illinois harvest as good to excellent as of December 31, below the 72% recorded at the end of November”, explains the analyst.

Winterkill worries

As winter wheat remains in a state of dormancy for the next few months, temperature and insulating snow cover are key characteristics to watch.

In the dormancy stage, winter wheat typically does not suffer damage from temperatures down to 0°F, but becomes vulnerable to damage when temperatures reach and remain below -10°F for a significant period of time (as this can kill the submerged growing point, resulting in winterkill). If there is snow cover (above 1 inch or more), these cold temperatures may not be able to penetrate the insulating qualities of the snow.

“Winterkill is not a common occurrence in U.S. winter wheat production regions, as the combination of extremely cold temperatures and little (less than 1 inch) or no snow cover is a rare event. However, this year many regions have a thinner snow cover than normal, increasing the chances of winterkill, while climate forecasts point to colder weather”, he notes.

The monthly report with winter wheat harvest conditions for some selected states showed that, in general, conditions remain better than last year, with a considerable improvement in conditions in the HRW producing regions. However, the risk of winterkill for this harvest remains relevant and deserves to be monitored closely. At this point, the scenario of a larger winter harvest remains for the US. Improved conditions increase the chance of higher yields and less area abandonment, which should compensate for the smaller planted area. On this last point, the USDA will bring relevant data this Friday, when it will release – together with WASDE – the first official estimates of planted area for the 24/25 harvest. As a result, the American harvest continues to bring bearish fundamentals to the wheat markets, and the improvement in conditions in Kansas indicates that the Kansas vs Chicago spread should remain around the average.