Wheat price surges as dry weather cuts global output

The global grain market has increasingly been turning its attention away from the potential negative impact of trade wars and raised tariffs to the outlook for a tightening market. Dry weather conditions across several key growing regions, especially outside the US, continues to drive down forecasts for the 2018 world harvest.

According to NOAA, the US scientific agency that monitors weather and atmospheric conditions, 2017 was the third hottest year on record globally, only exceeded by 2015 and 2016. The current outlook for 2018 could indicate that records might be broken again with several monthly records having been recorded so far this year. These developments helped provide US-traded grains and soybeans futures to a strong start off of the year before trade wars and tariffs helped send the sector, led by soybeans, sharply lower.

A recovery now seems to be underway, led by wheat, with multiple important growing regions from Europe and the Black Sea region to Australia all reporting challenging conditions due to drought. In Denmark, where we are located, the last major rainfall occurred back in April and since then bone dry conditions have created the worst conditions for farmers in decades. The lack of rain across Europe has turned normal green grazing fields into something that resembles sandy beaches. As a result of this farmers have been forced to dig into their winter feed stocks in order to keep their livestock alive and this development is currently driving wheat prices higher with buyers looking to cover/hedge their winter requirements.

The European wheat market, represented in the charts below by the September Paris milling wheat future, trades above €200/MT for the first time in three years. It has been supported by the mentioned buying, together with the fundamental support from further crop downgrades within Europe and now also talk that Russia may introduce export curbs to prevent domestic bread prices from rising. The London feed wheat contract, meanwhile, reached a fresh five-year high after rallying by 9% during the past week.

In Chicago the soft red winter wheat caught a bid on the developing panic in Europe. The contract for September delivery (ZWU8) at one stage yesterday rose by the maximum allowed by the exchange for the session when it hit $5.4525/bushel before ending up 6.2% at $5.42/bushel.