Are US wheat export estimates understated?

The deliverable grade of the wheat we trade in the US, particularly the Kansas City Board of Trade and Minneapolis Grain Exchange contracts, is high protein content and used primarily for food. However, regardless of how rich in protein the wheat may be, an oversupply could make it cheaper feed than corn, which is what we’ve seen happen. It is probably the best explanation for the unexpectedly low level of inventories reported in the quarterly stocks report.

Australia is set to harvest a record crop of 28.3 million tonnes, but it has been a very wet harvest, which lowered protein content. This will be the second consecutive year in which a significant portion of the Australian crop will be downgraded to feed grade. The market for high-protein content wheat is in Asia, and if Australia cannot supply all of its needs, then we could see a surprise pop in US exports. To illustrate, consider that milling-grade wheat in Australia is trading at $350 per tonne, a $120-per-tonne premium to feed-grade, which compares with the 10-year average of a $30 premium!

We believe that US exports will surprise to the upside.

Despite the strong reaction to the planting intentions report, a brief look ahead to the upcoming Northern Hemisphere winter wheat crops indicates that the period of burdensome wheat supplies could be drawing to a close. A drought in Eastern Europe during the planting season will limit the size of winter wheat harvests. In the Ukraine, for example, about a third of the grain area was affected and as a result the government is already implementing a program to restrict exports to beef up domestic inventory levels.

Buy March wheat. Place initial stops at $5.70 per bushel, close only.

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