The Chicago Board of Trade (CBOT) US Wheat Futures posted their first weekly gain in five before the Grain Deal’s renewal (more below), however, the gains proved to be short-lived. Thereafter, they lost more ground on Tuesday after a weekly U.S. government report showed improvement in the condition of the winter crop which had been hit by dry weather. The most-active wheat contract on CBOT fell 0.3% to $6.98-¾ a bushel.
The U.S. Department of Agriculture's (USDA) National Agricultural Statistics Service in a weekly crop report on Monday rated 19% of the winter wheat in top producer Kansas in good to excellent condition, up from 17% the previous week. Approximately 53% of U.S. winter wheat is produced in an area currently experiencing drought, the USDA said last week, a reduction from 55% a week earlier and down from 69% as the year began.
A deal to allow Ukraine to export grain from Black Sea ports has been extended beyond a March 18 deadline, but the length of the extension was unclear. Ukrainian officials said on Saturday the agreement had been extended by another 120 days, while a Russian foreign ministry spokesman said it had agreed to a 60-day extension after earlier warnings that the extension depended on the lifting of some Western sanctions. They also stipulated conditions for any prospective no-strings-attached agreement on the Black Sea Grain deal, according to which Moscow can opt to send free grain to African countries if those conditions were not met. The U.N. secretary-general also said in a statement that the agreement had been extended, but gave no timetable.
The Black Sea grain deal has seen more than 25 million tons of crops shipped out of Ukraine since it was first brokered by the United Nations and Turkey in July.
Meanwhile, Reuters reported on March 20 that, according to a forecast by the Ukrainian agriculture ministry, “Ukraine’s 2023 grain harvest is likely to fall to 44.3 million tons from 53.1 million in 2022 as less acreage is sown due to the war”. “The crop could include only 16.6 million tons of wheat, the ministry said.” Ukraine harvested a record 86 million tons of grain in peaceful 2021.
Summary
As it was in the case of coffee futures covered by us yesterday, wheat futures look fundamentally underpriced.
They're assuming that the extension of the Black Sea Grain Deal is entirely accomplished, and there will be plenty of grains supply going forward, which isn’t the case. The reality is, once again, that Moscow promised to adhere to this treaty only in a form of a 60-day extension, and ultimately longevity of the deal depends on the lifting of some Western sanctions, which, as many realize, is almost impossible to fulfill. Therefore, right now, it is the right time to use the current dip to take advantage of the imminent downward trend reversal. The biggest premiums will be in ZWN23 (Jul '23) and ZWU23 (Sep '23) futures.