Prior to the renewal of the Grain Agreement (see below), the Chicago Board of Trade (CBOT) US Wheat Futures registered their first weekly rise in five weeks; however, the gains were short-lived. Therefore, they lost additional ground on Tuesday when a weekly assessment from the U.S. government revealed an improvement in the drought-affected winter crop’s status. CBOT’s most active wheat contract lost 0.3% to $6.98-3/4 a bushel.
Wheat futures for July and September will gain the most from the price turnaround.
In a weekly crop assessment released on Monday, the U.S. Department of Agriculture’s (USDA) National Agricultural Statistics Service graded 19% of the winter wheat in Kansas as good to outstanding condition, up from 17% the previous week. The USDA reported last week that around 53% of U.S. winter wheat is grown in a region suffering drought, down from 55% a week earlier and from 69% at the beginning of the year.
The agreement allowing Ukraine to export grain from Black Sea ports has been extended beyond the March 18 deadline, but the duration of the extension is unknown. Ukrainian officials announced on Saturday that the agreement had been extended for an additional 120 days, while a Russian foreign ministry spokesman announced that Russia had agreed to a 60-day extension despite earlier warnings that the extension was contingent on the removal of certain Western sanctions.
They also established terms for any potential no-strings-attached agreement on the Black Sea Grain Agreement, according to which Russia may choose to transfer grain to African nations for free if these conditions are not reached. In a separate statement, the U.N. secretary-general confirmed that the agreement had been extended, but did not provide a timeline.
Since the United Nations and Turkey originally signed the Black Sea grain agreement in July, more than 25 million tons of Ukrainian harvests have been sent.
Nevertheless, Reuters reported on March 20 that, according to an estimate by the Ukrainian agricultural ministry, “Ukraine’s 2023 grain harvest is anticipated to decrease to 44.3 million tons from 53.1 million tons in 2022” According to the government, the crop might comprise just 16,6 million tons of wheat. In peaceful 2021, Ukraine harvested a record 86 million tons of grain.
Summary
As was the case with coffee futures yesterday, wheat futures appear fundamentally undervalued.
They are incorrectly expecting that the expansion of the Black Sea Grain Agreement is complete and that there will be an abundance of grains in the future. The fact is, once again, that Moscow pledged to abide to this treaty only for a 60-day extension, and the final duration of the agreement is contingent on the easing of some Western sanctions, which, as many are aware, is very hard to achieve. Thus, now is the moment to take advantage of the present slump in order to profit from the coming reversal of the negative trend. The futures with the highest premiums will be ZWN23 (Jul ’23) and ZWU23 (Sep ’23).