Good morning, and welcome to your Friday morning grain market update. The markets are showing a mixed bag this morning, with some sectors trending higher while others remain relatively stagnant. Let's delve into the specifics and analyze what's driving these shifts.
Spring Wheat Soars to Multi-Week Highs
One of the most significant developments this morning is the robust performance of spring wheat futures. They've reached fresh multi-week highs overnight, with the July contract trading at its best levels since April 17th. This surge follows a 12-cent rally on Thursday, suggesting a considerable shift in market sentiment. This upward trend can be largely attributed to the USDA's latest crop rating.
The USDA's rating of the US spring wheat crop at just 45% "good to excellent" on Monday is considerably below the average trade expectation of 71%. This 45% rating is the worst initial rating since 2021, tied with the equally poor rating of 2025 – the two worst in over 30 years. This revelation has significantly impacted market dynamics. The stark reality of a less-than-ideal spring wheat crop has clearly shaken confidence among some investors.
Large money managers, as of last Tuesday, held a net short position of 34,000 contracts in spring wheat. This represents the largest net short position in the modern era of CFTC record-keeping (starting in 2007). This massive short position, combined with the disappointing crop rating, has created a perfect storm for a significant price rally in spring wheat. The sheer volume of short contracts suggests a substantial number of investors anticipate price increases, potentially contributing to the current upward trajectory.
The Divergent Performance of Wheat Contracts
While spring wheat is enjoying a strong rally, the same cannot be said for all wheat contracts. The HRW (Hard Red Winter) wheat contract isn't performing as well, and the SRW (Soft Red Winter) futures are also lagging. This divergence warrants close scrutiny. Is the spring wheat rally strong enough to pull the other wheat contracts higher? Or is this a short-lived, "flash in the pan" event destined to fade quickly?
My current assessment is that it’s far too early to declare a sustained upward trend. While the combination of a poor crop rating and a record-breaking short position is undeniably bullish, the underlying fundamentals remain somewhat uncertain. The next USDA crop rating will be key. A significant shift in ratings next week—even a 15% improvement—could significantly alter market trajectory. The considerable short position is a double-edged sword; while it fueled the current rally, it also represents a potential risk for sharp price corrections should sentiment reverse.
Historically, when substantial short positions have been unwound, the resulting price increases have been notable. However, the current conditions suggest a degree of caution.
Drought Conditions and the AI Weather Model
The drought monitor shows significant variation in precipitation across the country. Areas of Minnesota and Wisconsin received significant rainfall, improving drought conditions. However, parts of northern Indiana, northern Illinois, northern Missouri, and parts of southwestern and southern Iowa experienced a lack of rainfall, which exacerbated drought conditions. A large portion of the High Plains did receive rainfall, leading to improved conditions across Nebraska, Kansas, and the Oklahoma panhandle.
Here's a summary of the drought situation in key agricultural regions:
| Region | Drought Condition Percentage |
|---|---|
| Corn Country | 23% |
| Soybeans | 17% |
| Winter Wheat | 16% |
| Spring Wheat | 29% |
| Cattle Country | 23% |
The drought situation in Nebraska, while showing some improvement, isn't as dramatic as initially expected. Maps illustrating the amount of rainfall required to fully alleviate drought conditions in certain regions were recently released, highlighting the significant water deficit. Several areas are shown to need 8-10 inches of rainfall over the next month for significant improvement. While some areas saw subsoil recharging, many remain in a long-term drought. The rainfall disparities across the corn belt are significant, with northern Illinois notably dry, contrasting sharply with the relatively wetter southern half of the state. These disparities underscore the complexity of predicting market response to weather conditions.
Further complicating the picture is the introduction of a new AI-based weather forecasting model, the AIFS (Artificial Intelligence Forecasting System). This model, launched in February, is already gaining traction amongst commodity traders. The AIFS model is designed to complement traditional physics-based forecasting, providing an alternative viewpoint on future weather patterns. This AI model's forecasts are also not particularly bullish, predicting 123% of normal rainfall across US corn areas in the next 14 days – a rather high prediction indicating potential for excessive moisture in some areas while others are very dry. The AIFS highlights the ongoing need for diverse data sources in decision-making.
Trump's Tariffs and Their Market Impact
A federal appeals court temporarily reinstated Trump's global tariffs on Thursday, creating uncertainty in the global markets. A US trade court's prior ruling had deemed Trump's use of emergency powers to impose tariffs inappropriate. This temporary reinstatement allows the tariffs to remain in effect pending further legal proceedings. The administration is committed to appealing the ruling and may even take the case to the Supreme Court. The reinstated tariffs could significantly increase the effective US tariff rate from under 6% to 27%.
However, initial market reactions to this news have been relatively muted. Many market analysts believe that the markets are largely exhausted by the continuous back-and-forth surrounding tariffs, indicating a degree of fatigue towards the topic. This suggests that unless there are further drastic changes or legal actions, the market's immediate response will likely remain subdued. Goldman Sachs' analysis supported this outlook suggesting that the market views this decision as more of a minor speedbump than a significant game changer.
The tariffs, however, remain a significant bargaining chip in trade negotiations, and their potential removal or alteration could cause substantial market fluctuations. The removal of these tariffs could negatively impact U.S. negotiating position in future trade talks and could impact trade deficits.
Biofuel Mandates and Their Implications
The Trump administration is considering a plan to eliminate a significant backlog of small refinery biofuel waivers. This action could resolve over 160 pending exemption requests, impacting the price of renewable fuel credits and subsequently affecting ethanol, corn, and soybean markets. Larger refiners would need to make up for the previously exempted gallons, causing potential market shifts.
Our resident biofuel expert notes that this plan sets a concerning precedent, suggesting a lack of commitment to the renewable fuel standard program and potentially prioritizing the interests of refiners over those of US farmers. This could be a serious blow to the farm economy, and the removal of the current blend mandates could substantially weaken domestic demand for corn and soybeans. If this happens, it could significantly reduce biofuel production and demand.
There’s a great deal of uncertainty about how this situation could impact the market. A major concern is the potential for increased reliance on government support payments to farmers instead of sustained market-driven price increases. The next few weeks will be crucial as this plan proceeds.
Looking Ahead
In summary, this week's market action has been driven by a multitude of factors: a weak spring wheat crop rating, a record short position in spring wheat, varied drought conditions, the introduction of a new AI-based weather model, the temporary reinstatement of Trump's global tariffs, and the ongoing debate over biofuel mandates. Overall, the market is awaiting important updates, including the next USDA crop ratings, the resolution of the biofuel waiver backlog, and, of course, the continued evolution of the global trade situation. As we approach the end of May, the market remains dynamic and sensitive to these numerous influencing factors.