Wheat looks to be well stocked

Global wheat production over the past several years has stagnated, albeit at record high levels. The exception was the 2010-11 crop year, which was affected mostly by the disastrous crops in the FSU and saw global output fall by 5% from the previous season.

The bull market was extended because of the massive drought that saw FSU output and exports fall by 20% and 61%, respectively, from the previous season. Consumption, however, had stagnated along with output, and the global market remained amply supplied.

The Northern Hemisphere 2011-12 winter and spring-wheat harvests are all in, so the supply picture for the current marketing year typically does not change much at this time of year. The two key Southern Hemisphere growing nations – Australia and Argentina – are harvesting their crops. The results can still impact the 2011-12 balance sheet.

Considering a planned 3% increase in Argentinean wheat area, the crop will be a disappointment. Dry weather delayed planting and restricted the amount of wheat that could be sown. The poor weather persisted through much of the growing season. The USDA revised its estimate for the crop downwards by 500,000 tonnes in its November crop report, to 13 million tonnes. That compares with a bumper crop in 2010-11 of 15.5 million tonnes. Most recently, rain has returned, and analysts are saying that it could be sufficient to improve the outlook for the crop.

The Australian crop should be about 26 million tonnes, about the same size as last year. The 2010-11 season was plagued by flooding, which reduced protein content, leaving only a much-smaller-than-normal percentage of high quality, milling-grade wheat. This year, there’s been excessive precipitation since mid-November in both the Eastern and Western growing regions. Although it seems that protein levels will be compromised to some degree, it will not be anywhere near the problem it was in the previous season.

The Australian problem is relatively fresh, but for the moment anyway, involves a relatively small amount of wheat. As far as Argentina is concerned, it has been known for some time that the crop would be small and that exports would fall by close to 2 million tonnes. So we don’t anticipate much fallout from the Southern hemisphere crop problems at this time.

US export commitments stand at 17.4 million tonnes, compared with 22.5 million tonnes last year at this time. That is no great surprise, because the USDA estimates that total sales for 2011-12 will fall by 25%. In fact sales are a tad ahead of the USDA target. Global consumption is expected to rise to a record 675 million tonnes, but the US market share is shrinking.

Northern Hemisphere winter wheat acreage estimates for 2012-13 and the progress of the crops – which have already been planted – are the important items on the agenda that will set the tone for the wheat market in the coming months.

We will not get an accurate estimate for US acreage until the January planting intentions report. The weekly progress reports show that crop conditions in the early growing are not ideal. At 88%, the emergence rate is pretty much in line with the five-year average. The good-to-excellent portion of the crop stands at 50%, above the 47% we saw last year at this time, but significantly below the previous year’s 63%. But it’s very early.

Chinese wheat acreage is expected to expand marginally, and there’s been very little information available about planted area or planting progress in the FSU.

The estimate for 2011-12 global ending stocks is 203 million tonnes, or 29.9% of consumption. That is slightly lower than the two previous marketing years, but still well above the average of the mid-decade years of about 23% of usage that drove prices beyond $12 per bushel in 2008.

Maintain short positions recommended on September 16. Lower stops to $7 per bushel, close only.

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