This week's Hedgepoint Global Markets Grains and Oilseeds report addresses the significant increases in wheat futures contracts. “In a market that is extremely sold on contracts traded in Chicago, bullish fundamentals can be boosted by “covering” movements of these short positions – and the headlines coming from Russia seem to have managed to initiate this movement”, comments Alef Dias, grains analyst and Macroeconomics from Hedgepoint.
“Just as we had done in our monthly call broadcast last Thursday (18), Sovecon – a consultancy specializing 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 the deterioration of harvest conditions in the south of the country”, notes Alef.
Southern Russia is the country's largest wheat-producing region, accounting for more than 40% of the total harvest. The main reason for the estimate revision is the dry weather conditions in southern Russia.
According to the analyst, “in the last 30 days, humidity levels in the region were 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 crop conditions to be average/slightly above average in Rostov and Krasnodar (Russia's two largest wheat producers) and slightly below average in Stavropol (third largest).
In the coming weeks, leading weather models predict 60-90% of normal precipitation in the South, which, combined with high temperatures (2-4°C above normal), are unlikely to significantly improve moisture availability for plants in the region. .
“If the South does not receive significant rainfall over the next 2 to 4 weeks, the region could face a crop failure. However, this may be partially offset by relatively high yields in the Volga region and the Center, where harvest conditions still appear better than average. The weather is also starting to be a concern for the country's spring crop, which is expected to begin planting next month. Siberia, the main spring wheat producing region, has soil moisture below the lowest levels of the last 5 years”, he highlights.
“Headlines coming from Russia brought significant upward pressure to wheat contracts this week. In addition to attacks on Ukrainian port infrastructure – which add risks to grain transit in the Black Sea, the market began to worry about the deterioration of Russian harvest conditions”, he points out.
Despite the still limited impact on harvest estimates, there is still room for a significant deterioration in the Russian harvest if the weather continues to be negative for productivity. The winter crop will only be harvested in 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 relevant support for wheat prices in the coming months”, he concludes.
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