This Year's American Wheat Harvest Has Been Awful

Episode Summary

Executive Summary: The episode examines why wheat markets remain under extreme pressure, combining bad weather, poor planting progress, drought, Russia-Ukraine supply disruptions, and heavy Chinese buying. Guest Angie Setzer explains how different wheat classes and regional crop conditions create a tighter-than-normal supply picture, while futures, basis, and export behavior signal stress across the physical market and potential downstream effects on food prices and trade.

Main Topics: Wheat as a recurring “perfect storm” commodity (Priority: 5/5): Joe and Tracy argue that repeated commodity shocks may reflect structural fragility, not just random bad luck, using wheat as the clearest example of weather, supply, and geopolitical disruption piling up at once. Regional wheat classes and planting conditions (Priority: 5/5): Setzer breaks down hard red winter, soft red winter, and spring wheat, explaining that each faces different conditions: drought in the southern plains, poor fall planting in the East, and delayed spring planting in the northern belt. Poor crop ratings and reduced U.S. supply (Priority: 5/5): The hard red winter wheat crop is described as one of the worst rated on record, with USDA cutting yield expectations and abandonment rising, pointing to one of the smallest U.S. hard red winter wheat crops since the 1960s. Futures curve, carry, and cash market stress (Priority: 4/5): The conversation explains how inversion/backwardation after the Ukraine invasion disrupted elevators and mills, while more recent carry in parts of the curve reflects logistical pressure and the need to keep grain in the pipeline. Global demand, China, and export vulnerability (Priority: 5/5): Setzer argues that China’s huge grain buying and stockpiling materially tightened global availability, reducing slack and making the market more vulnerable to shocks and export restrictions. Policy responses and farm risk management (Priority: 4/5): The guests discuss crop insurance, subsidies, and market incentives as partial solutions, but conclude that the most important levers are weather cooperation, strong prices, and avoiding policies that distort planting decisions. Physical logistics and grain movement challenges (Priority: 3/5): The episode closes on the complexity of moving wheat and other grains via truck, including tracking, ticketing, rejected loads, and communication problems, which create real friction in the cash market.

Key Arguments: Repeated commodity shortages may reveal structural fragility in ag markets, not just isolated weather events. Wheat supply is tight because multiple classes are under stress at the same time: poor fall planting, drought, and delayed spring planting. The U.S. hard red winter crop is among the worst rated on record, with yield expectations and carryout falling sharply. After the Russia-Ukraine invasion, extreme futures inversions disrupted elevators and flour mills, forcing some buyers to withdraw bids. Carry and basis behavior matter as much as futures because cash market conditions determine whether grain moves into the pipeline. China’s aggressive grain import and stockpiling behavior reduced global slack and amplified price volatility. Crop insurance and strong market prices can incentivize planting, but weather remains the decisive variable. High input costs, especially fertilizer, increase the financial stress on farmers even when they can still access supplies. Physical grain logistics remain inefficient and vulnerable to communication and tracking failures, adding friction to supply chains.

Data Points: U.S. wheat production expectation: 1.73 billion bushels - Setzer contrasts 2022 production expectations with about 1.83 billion bushels in 2020. U.S. wheat production comparison: 1.83 billion bushels - Referenced as the earlier benchmark production level. Production decline: 100 million bushels - Approximate drop in expected overall wheat production versus 2020. Hard red winter carryout: 360 million bushels - Expected ending stocks for hard red winter wheat, down from much higher levels previously. Hard red winter carryout peak: close to 1 billion bushels - Historical level described as burdensome and much larger than current expectations. Hard red winter price level: below $4 per bushel - Wheat traded below this level multiple times between 2015 and 2019, encouraging farmers to switch crops. Hard red winter yield shortfall: about 10 bushels per acre below average - USDA lowered yield expectations for the southern plains crop. U.S. hard red winter crop size: one of the smallest since the 1960s - Setzer’s characterization of the current crop outlook. Chicago wheat move after invasion: July delivery went to a $2 inverse - Extreme backwardation after the Russia-Ukraine invasion. Chicago wheat price surge: $12.50 to $13 per bushel - Price range mentioned when describing how far the board rallied during the shock. China corn imports: 28 million metric tons - Last year’s level cited as a dramatic jump from prior norms. China corn import outlook: 23 million metric tons - Projected imports mentioned in the discussion. Ukraine reliance in some regions: over 60% of purchases - Middle Eastern and North African countries were highly dependent on Ukraine for wheat. December 23 corn futures: near $6.50 - Used to show that new-crop prices remained elevated enough to incentivize planting. Wheat futures for next year: $11.14 - Example of strong forward pricing supporting planting incentives. Corn crop insurance support price: $1.40 below current market - Illustrates that market prices, not insurance floors, are currently driving planting decisions. Soybean load value example: $18,000 per 1,000-bushel load - Used to highlight the financial stakes in physical grain transport.

Pivotal Quotes: "if you keep having perfect storms over and over again, right? And A, maybe they're just normal storms, and B, they might reveal something underlying" — Tracy Alloway: Introduces the idea that recurring commodity shocks may reflect structural market weakness rather than isolated luck. "we've transitioned from what the U.S. used to be the breadbasket of the world" — Angie Setzer: Describes the long-term globalization of food supply and reduced U.S. dominance. "the cash market is king no matter how you slice it" — Angie Setzer: Explains that physical pricing and basis ultimately determine grain movement and market behavior.

Implications: Wheat remains exposed to weather, geopolitics, and tight global stockpiles, so volatility may persist. For consumers, food inflation may stay sticky; for farmers and traders, hedging, logistics, and planting decisions will remain highly sensitive to weather and export policy.