How the Extreme Weather Conditions Are Shaping the US Wheat Market in 2021-22
Reading time: 6 minutes
In 2021, the US Wheat market faces a challenging situation due to extreme weather conditions. Weather is dividing the country between regions suffering from the cold droughts in winter, which persisted throughout the months, only to be replaced by the dry and hot summer conditions in June and July. On the other hand, the South-Western parts of the country have had to face large amounts of rainwater. While the winter crops suffered limited loss, the spring crops met set back after set back. Moreover, USDA Supply and Demand report continuously decreased the Wheat output month by month, primarily due to the disastrous spring crops. The consequence of a lower production was also to decrease US Wheat exports and increase US Wheat imports forecasts.
The Extreme Weather
Drove the Market Craze
The lasting dryness and heat greatly affected spring Wheat growth and quality so far in 2021. Indeed, with the lack of moisture in soils, the planting area decreased, thus resulting in smaller forecast crop production.
Figure 1: US Soil Moisture Index For 2019, 2020, and 2021 (Source: Copernicus)
The heat, which came in late spring 2021 and lasted throughout July and August, prevented the crop’s growth in critical stages, cutting down the yield and thus the production. This led to a divide in pricing for the different US Wheat crops.
Figure 2: US Winter and Spring Wheat Prices Between Jan – Aug 2021
Figure 2 shows the US Wheat prices by Spec, and so it offers the pricing for the various US crops. In January 2021, prices for each crop were relatively close to each other. However, by April of the same year, spring Wheat conditions degraded so much that prices started diverging after the bump in May. While winter Wheat prices decreased, spring Wheat prices continued rising. This divide showed the uncertainty of the entire Wheat market, leading to increasing prices’ volatility.
Figure 3: US Winter Wheat Spot Cash Prices & Volatility Between Jan & Aug 2021
Figure 3 displays individual Wheat prices in red, the mean as the yellow line, and standard deviation in yellow bands. The standard deviation clearly shows that while there is a spread in values in January 2021, the standard deviation is not significant. However, with prices tanking in March through April 2021 and from June 2021 onwards, the standard deviation becomes significant for Winter Wheat due to the spread between HRW and RSW Wheat, showing that weather events and crop reports impacted the market during these periods even for this crop.
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What Are the Consequences on US Wheat Supply & Demand?
The weather impacted Wheat prices due to the uncertainty but also since it affected the production and quality of the commodity. Thus the Supply and Demand of US Wheat changed, punctuated by the USDA reports.
Figure 4: US Wheat Production, Exports, and Imports (source: USDA)
The S&D metrics as per June 2021 displayed in Figure 4 show that while spring Wheat production became depreciated, winter Wheat—the central part of the US Wheat production—benefited from the heat and sun with a better output. Nonetheless, the projected output for 2021-22 in July is worse than that of the previous year by around 4%, and exports are regressing by 9% from the previous year due to good stock supplies. while imports increased by 1.086 Mmt.
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Figure 5: US Wheat Export Destinations & Import Origins Distribution
Between Aug 2020 – Aug 2021
As a major Wheat export country, US exports depend on many origins, displayed in plot 1 of Figure 5, with the major part of shipments going to countries representing ~1% or less of all shipments each. On an individual basis, Mexico, the Philippines, and China are the main three importing countries, and the US strongly depends on them for exports. With China Wheat production looking more important in 2021-22, thus lowering imports from the US and contributing to US Wheat lower exports in general in 2021-22.
US Wheat imports on the contrary, depend mainly on two origins (according to AgFlow’s data), with Canada representing the most significant part of it, as shown in plot 2 of Figure 5. However, just as the US, Canada Wheat suffers greatly from the hot and dry weather as well as wildfires taking place in August 2021. Thus, the US might need to pool Wheat from other origins. As European and Black Sea Wheat having a large production in 2021-22, these origins could be serious options for Wheat imports.
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In a Nutshell
Extreme Weather conditions in the US have a major impact on all crops in 2021. Dry and hot conditions limited planting areas, yield, and ultimately production. The weather and its effects on Wheat production also bear great importance on pricing. Constant readjustments on the output and unpredictability of weather lead to market uncertainty, reflected by the growing volatility of the diverging pricing for winter & spring Wheat crops.
Moreover, the weather also had a crucial impact on the production and the US Wheat S&D in general. Indeed, for the marketing year 2021-22, exports decreased due in part to lower demand from China, while imports increased. However, US Wheat imports are majorly from Canada, which also suffers from the same issues as the US Wheat market. As such, the US will probably turn towards other Wheat sources, and with the EU and Black Sea both having a high Wheat production, they could be competitive origins for American Wheat importers.
Finally, the US Wheat market in 2021-22 is well reflected in the pricing. With mixed signals between crop reports and potential rainfalls—usually just as small showers— the market is uncertain and will need to see the end of the harvesting season to see some more stability finally.