By Patrick Sparks, Global Risk Management Inc.

Dryness in the Southern Plains and support for a continued La Nina into the spring will keep wheat end users on edge!

A La Nina is a global weather pattern spurred on by cooling of ocean surface temperatures in parts of the Pacific Ocean, and for the second year in a row, is gracing us with its presence. Weather across the key winter wheat production region of the U.S. Southern Plains has been mostly following the typical conditions to be expected under a La Nina; below normal precipitation and above normal temperatures during the winter months. Much of the Hard Red Winter Wheat (HRW) production region has seen less than 50% of normal precipitation and above normal temperatures over the last 60 days which has reduced soil moistures and expanded drought conditions. In their final report of 2021, the USDA’s “U.S. Agriculture in Drought” Report noted that 65% of winter wheat areas are experiencing some class of drought vs. 35% a year ago. Current crop conditions have Kansas’s wheat crop rated just 33% good to excellent vs. 51% in December and 46% last year. Other key HRW wheat states also saw notable reductions to crop conditions from December.

Source: High Plains Regional Climate Center

With the 22/23 HRW wheat crop planted and dormant at this time, immediate stress impact is limited and one should know that there is little to no correlation between crop conditions in the fall/winter and final yields. Ultimately rain in the spring (or lack thereof) during key growth stages will have by far the most impact on yields, but with U.S. wheat stocks at their lowest level in 8 years, major global wheat exporter stocks to use ratios record tight and prices at high levels, there is heightened anxiety around the production potential for the upcoming crop. In search of an early indicator, GRM analyzed wheat yields in Kansas (top U.S. winter wheat producer) over the last 50 years to look for any distinct production patterns in years that dealt with La Nina’s.

In the 50 years from 1972 to 2021, wheat yields in Kansas posted a new record high 6 times (12% of the time) and came in 5% or more below trend 21 times (42%). In that 50 year span there were eight instances of a La Nina occurring. In looking at those 8 La Nina years, not one of them saw a new record yield and 5 of the years (63%) were 5% or more below normal. While you don’t have to look back far to find instances of good yields during La Nina’s (last year was a La Nina and yields in Kansas were tied for the 2nd highest on record), history shows that the odds of underperformance in yields versus trend increase in La Nina’s.

So, while not a death sentence for the U.S. winter wheat crop by any means, the data shows an increased risk to a below trend yield outcome when a La Nina is in place. With the Climate Prediction Center recently saying there’s 95% likelihood of La Nina conditions continuing through the N. Hemisphere winter and short term forecasts remaining dry for most of the Southern Plains, the concern around this year’s crop will be with us for months to come. In conclusion, as seasoned market participants know, it’s far too early to “kill the crop”, but given current conditions and reduced stocks of wheat, there will be immense pressure for rains to perform well this spring when the crop comes out of dormancy. If adequate rains do not show up in the spring, expect a price rally. With prices having sold off recently to near 2 month lows, downside may be limited until those spring rains can be verified. If nothing else, a La Nina will continue to provide volatility and uncertainty!

 

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