Ukrainian analysts too pessimistic on wheat crop, again

Ukraine has been one of the only sore spots on the global wheat front in terms of crop prospects, but recent conditions suggest that the market could be strongly underestimating the crop.

Last week, the U.S. Department of Agriculture's Kiev attaché pegged the 2016-17 Ukraine wheat crop at 24.5 million tonnes.

This is 10 percent down from last year's record crop, but at least 20 percent higher than most industry estimates. The Black Sea country has become a major world wheat exporter and is expected to carry nearly 10 percent of this year's world wheat trade.

If the attaché's estimate proves true, then many analysts are working with a Ukraine wheat number 6 million tonnes lower than reality, artificially deflating world wheat supply.

April estimates from Ukrainian-based analysts place the 2016-17 wheat crop between 18 million and 21.5 million tonnes, relatively close to initial estimates from late last year. The only other group with an estimate near the attaché's is Thomson Reuters Lanworth at 24.1 million tonnes, which it has maintained since late last year.

There are always several unknowns when it comes to the Ukraine crop situation, but based on current conditions and the mildness of this season's weather, the Ukraine wheat crop could blow market expectations out of the water for the third year in a row.

Concerns Were Justified

Ukraine experienced a "flash drought" toward the end of summer 2015, and by the start of the winter wheat sowing period in September, soils were among the driest in decades. This caused many farmers to delay sowing in hopes that rains would come and improve conditions, but rain remained sparse.

By Nov. 30, only 91 percent of the target winter wheat area was reported as planted. Normally, farmers tend to wrap winter sowing in early November so that the crop has time to germinate before winter forces it into dormancy.

Winter wheat area for the 2016-17 campaign was already expected to be more than 10 percent down on the year, and the autumn planting progress reports from late in the year suggested this figure could fall more than 20 percent.

But that was a best-case scenario, assuming that all the wheat could be harvested. Late November crop reports listed 36 percent of Ukraine winter wheat in poor condition, meaning that a lot of hectares could be lost if the winter and spring weather were not cooperative. These risks were heightened due to the late sowing.

The sharply lower crop estimates certainly seemed warranted late last year given everything that had occurred. But the fact that these same analysts maintain more or less the same positions at present is somewhat baffling.

The latest figures out of Ukraine suggest that roughly 6 million hectares of winter wheat had been planted, which is only about 2 percent down from the initial target. Spring wheat, although it is lower-yielding, is expected to add a couple percentage points to the overall sown area.

No Denying the Weather

Not only has wheat area seemingly bounced back, but almost everything that Ukrainian winter wheat needed to happen with the weather has happened. A very warm December helped late-planted wheat to sprout, and coupled with modest January temperatures, winter crops were protected from deep freeze.

February was off-the-charts warm, and without a return to freezing conditions in March or April, crops were able to break dormancy early without penalty. Soil moisture reserves also slowly built back up with decent precipitation over the last four months.

As such, conditions have vastly improved. Analyst UkrAgroConsult noted that 29.9 percent of the winter wheat crop was in poor condition as of March 10, but that has improved to 19.5 percent as of April 21.

Vegetation density as implied by satellite imagery suggests that crop health may be better than last year. Recent values are either at or above the 15-year average, and in almost all cases, above 2015.

The imagery also reflects the relatively advanced stage of the crop, which is ahead of normal development by two to three weeks in many places. This is very supportive of good yields as the earlier that pollination and grain fill take place, the lesser the chances of it being too hot for the crop to meet its full potential.

The weather forecast is favorable. Moderate rainfall is expected throughout the next two weeks, which will ease off the dryness concerns. Steady, warmer temperatures will aid further development, but toward the end of the month, normal to cooler temperatures will be most preferable for good yields.

Given the advanced state of the crop and assuming no harvest interruptions later in the summer, Ukraine wheat may be home free if it can make it through the next six to seven weeks without extreme weather.

Pessimism Becoming a Theme

If Ukraine's good weather fortunes are not enough to validate a larger wheat crop, perhaps the recurring pessimism of Ukrainian analysts is.

In recent years, industry estimates of the Ukraine wheat crop have severely undermined the final harvested volume. This is especially true of the two previous harvests, which also enjoyed very mild winter conditions similar to the current crop.

Although there were dryness concerns at several points throughout those seasons, the final wheat volumes were the largest and third-largest post-independence in 1991. But even up into the late spring months, some analysts were still pegging those crops up to 25 percent lower than what they really were.

Pessimism in Ukraine is somewhat understandable given that yields, production and exports seem to keep hitting new records each year, and it is risky to assume that those trends will carry into the next year. But if this crop ends up being bigger than everyone expected, it might be time to accept what used to seem anomalous as the new normal.