Drought dries up Canada's prospects for wheat exports

When global wheat supplies started tightening due to the Russia-Ukraine war and El Nino drying out Australian crop, Canada was expected to be the bright spot in the market.

In its August principal field crop update, Statistics Canada reported that farmers planted the country's widest wheat area since 1997, at 10.7 million hectares for marketing year 2023-24. Spring wheat led the expansion, with area planted rising 8% on the year to 8.3 million hectares.

But Canada is also experiencing rising temperatures and poor soil moisture levels, leaving market participants questioning its fresh wheat crop quality and export potential.

The Agriculture and Agri-Food Canada in its August report reduced its forecast for total wheat output in MY 2023-24 to 33.2 million mt -- 2% lower year on year -- from a 35.3 million mt full-year forecast released in July. It projects Canada's wheat exports for MY 2023-24 at 23.8 million mt, lower than the 24.6 million mt in last season.

"For 2023-24, the most significant agricultural risk is climate-related as severe drought continues across Western Canada, with the most impact felt in Southern Alberta and Western Saskatchewan," the AAFC said in its report. "Significant uncertainty remains at this time regarding estimates of crop yield and production.".

Canada's common wheat output in MY 2023-24 was seen at 28.3 million mt, largely steady year on year, according to the AAFC report. Durum wheat production, on the other hand, was forecast to fall more than 9% year on year at 4.9 million mt, with the primary growing regions located in southern Alberta and southwest Saskatchewan.

"Supply was already tight going into the current crop year and prices have been reacting sharply higher," said Wes Petkau, senior grains and oilseeds analyst at S&P Global Commodity Insights.

Spring wheat market participants expressed concerns throughout the growing season about the weather's impact on the new crop. Market sources estimated that Canada Western Red Spring wheat output around 21 million-22 million mt, though projections varied widely around the market.

A volatile grain futures markets coupled with uncertain yield estimates kept many market participants sidelined. Sales from May onward were primarily hand-to-mouth. Bid-offer ranges for FOB Vancouver basis prices, the premium over Minneapolis spring wheat futures, were wide for many months as market value fluctuated depending on trade location. Many in the market were content to wait until closer to harvest -- when more information about the quality and protein content would be known -- to actively market grain.

Wheat price trends

FOB Vancouver premiums over Minneapolis spring wheat futures were relatively stable over the year, particularly as many in the market began to expect volatility due to weather and war. FOB prices largely tracked Minneapolis spring wheat futures, which were highly susceptible to the ongoing volatility.

The December contract on the grain exchange in Minneapolis reached an eight-month high of $9.445/bushel in July after the Black Sea grain deal ended. In Vancouver, prices were largely steady throughout the marketing year and inched up during peak harvest season in September to October before cooling down in the following months.

Persistent tensions in the Black Sea region, however, pushed prices of Canadian wheat higher sporadically throughout the remainder of the year. But considering that FOB Vancouver outright prices moved primarily in tandem with futures over the year, the massive fluctuations in the market had kept trade activity mostly subdued.

Platts assessed the 13.5% FOB Vancouver 30-45 days forward at $316.18/mt Aug. 30, a $62.47/mt decline year on year and $56.86/mt lower than the first assessment of 2023, S&P Global data showed.

Muted wheat trade interest

Market liquidity has been low for much of the growing season as trade participants remained disengaged amid ongoing volatility, keeping price discovery a challenge. Market value fluctuated dramatically on any given day, which meant sales were limited.

Once crops began experiencing heat stress and weather worries worsened, farmers were keen to hang on to both old and new crop supplies until closer to harvest.

As harvest progresses in the next few weeks farmers are likely to begin offloading more stocks as holding on to the crop will diminish crop moisture below the required levels amid heat stress, said a trader based in Regina, Saskatchewan.

International tenders are being closely watched during this lull in market engagement, particularly the regular Japan tender issued by Japan's Ministry of Agriculture, Forestry and Fisheries, which consistently sought high protein wheat and often sourced this from the US and Canada.

Although Japan tenders sought 13.8% CWRS wheat, which typically carries a premium to 13.5% CWRS wheat, the quality difference between the two was minimal for much of the year. Market value for the tender often tracked that of the Platts assessed 13.5% FOB Vancouver wheat market.

Global wheat supply concerns

The weather -- being increasingly dry and hot -- has been keeping markets on edge. Drought throughout key wheat producing regions in North America and the EU are also adding to the supply pressure.

"As Australia is reeling under El Nino pressure and supplies have shrunk from Ukraine, Canada was expected to plug the gap. But its limited potential this year is likely to tighten global supplies further," a trader with a multinational trading firm said.

In the latest World Agricultural Supply and Demand Estimates report Aug. 11, the US Department of Agriculture pegged global wheat exports in MY 2023-24 (July-June) at 209.4 million mt, down 9 million mt from the previous marketing year.

Wheat exports from Ukraine, a key supplier, have been stumbling since Russia's invasion in February 2022. With the Black Sea Grain Deal falling apart in July, there have been doubts over future exports from Ukraine.

In an August report, the USDA estimated Ukraine's wheat exports in MY 2023-24 at 10.5 million mt, against 16.8 million mt in the previous year.

Australia's wheat exports are also likely to decline sharply due to rising temperatures and a likely fall in yields. According to the USDA, Australian wheat exports is projected to fall 11 million mt on year at 21.5 million mt in MY 2023-24 (October-September).

With the weather in Canada's key wheat producing regions being no better, persistent drought conditions are likely to weigh on its harvest and limit its opportunity to plug the export gap.