According to the USDA’s September crop report, global wheat production for 2011-12 is estimated to have grown by 30 million tonnes, or 4.6%, over the previous season. Ending stocks were revised upwards, from 28% of usage to 28.7%, but still will be down from last year’s 29.5% of usage, because consumption is estimated to grow substantially as well.
The largest single factor in the close-to-$5-per-bushel rally in the wheat market, which lasted from July 2010 to early-2011, was the crop failure in the FSU. Output in the region for the 2010-11 marketing year fell by a glaring 29% from 2009-10, to 81 million tonnes.
Northern Hemisphere 2011-12 winter wheat crops have now been harvested, and it seems that production has recovered. Total output for major exporters Russia, Ukraine and Kazakhstan is estimated to have bounced back to 107.45 million tonnes. Exports are expected to more than double from 14.61 million tonnes in 2010-11, to 33.21 million tonnes.
Excessive precipitation during the harvest in late August and early September, however, has compromised the rosy outlook for both FSU and EU wheat crops. At one point earlier in the season it was believed that Ukrainian wheat output would improve not only in size but in quality as well. The agriculture ministry had forecast that 70% of the crop would be milling quality, food-grade wheat. Earlier this month, it retreated on that estimate, saying that only 40% to 45% of the crop would be food-grade.
The effect on the EU crop was not as dramatic, but estimates have been lowered, for both size and quality.
Quality concerns are also an issue in the US. As it is, the crop is 4 million tonnes, or 6.6%, smaller than last year. Minneapolis Grain Exchange wheat, which represents the highest quality in the United States, has gained substantially over Chicago Board of Trade and Kansas City Board of Trade prices.
Normally, the quality concerns in these major exporting countries would be causing a bit of a stir, but wheat prices have been trending lower since late August, particularly with the USDA’s forecast for record global demand.
In its September crop report, the USDA cut its estimate for 2011-12 US exports by 2 million tonnes, to 27.9 million tonnes. That would be 20% below 2010-11 exports. Export commitments to date stand at just over 13 million tonnes, only 15% below last year at this time. However, given the very slow pace of new sales over the past couple of months, it’s only a matter of time before commitment data more accurately reflect the USDA forecast for 2011-12.
There was a period of strong new-crop sales before the marketing year began, but they have been dwindling. To illustrate, consider that since the beginning of the marketing year that began in June, weekly commitments have averaged 463,000 tonnes, compared with a weekly average of 809,000 tonnes during the same period in 2010.
This explains why news of the shrinking supply of milling quality wheat has failed to inspire any rallies in the wheat market. Prices are still sky high by historical standards, and with a reasonably well stocked pool of global inventories, demand for US wheat will remain weak. The excellent sales we saw in 2010 occurred when prices were closer to $5 per bushel and have tailed off since.
In addition, Australia, a key exporter to Asia, is expected to have an excellent crop. A recent ABARE (the Australian equivalent of the USDA) estimate puts 2011-12 Australian exports 3 million tonnes above the USDA estimate of 17 million tonnes. And quality is expected to be much improved over last season. So even with the quality concerns in the Northern Hemisphere crops, there are compensatory factors elsewhere in the world.
We recommend establishing short positions in December Chicago Board of Trade wheat, using initial sell stops of $8.10 per bushel, close only.