Grain traders had to sift through an entire slew of USDA reports on January 12. The report that attracted the most attention was the first planting intentions report for the US winter wheat crop that was planted this past autumn. That crop will comprise over 70% of the wheat grown for the 2012-13 marketing year. The average of analysts’ guesstimates was 40.933 million acres, but the actual figure came in slightly more than 1 million acres higher, at 41.947 million acres. That’s substantially above last year’s planted area of 40.646 million acres. Just to put that into historical perspective, US wheat acreage is still below some of the larger plantings of the past decade that averaged about 45 million acres.
Quarterly stocks as of December 1 were 45.134 million tonnes (1.656 billion bushels), 1.05 million tonnes (39 million bushels) below the average of analysts’ guesstimates. That stood in contrast to corn and soybean stocks, both of which came in considerably above expectations. The market focused on the higher-than-expected acreage report, however, and prices plunged on the news, with March wheat falling by 36¢ per bushel.
The other noteworthy item was found in the regular monthly USDA crop report. The estimate for 2011-12 US exports was raised by 680,000 tonnes (25 million bushels). Export commitments stand at 19.95 million tonnes, down from 26.19 million tonnes at this time last year. The USDA target is much lower than last year, though. Final sales are now forecast at 25.86 million tonnes, down from 35.08 million tonnes in 2010-11. Commitments continue to run at a slightly better pace than last year, but more significantly, shipments are very strong. Last year at this time, shipments were 68% of commitments-to-date and 51% of final sales. This year, shipments are 78% of commitments-to-date and 60% of final sales.
The sharp drop in prices in 2011 – cash prices peaked at $9 per bushel last January – has stimulated some foreign trade. The problem, of course, is that the US has competition, primarily from the FSU. Total wheat output for the FSU is estimated at 114 million tonnes, up from drought-stricken 2010-11output of only 81 million tonnes. There are several mitigating factors, though, that allows us to believe that demand will continue to outpace current estimates.
While all grain prices have been in a precipitous downtrend, wheat prices have actually collapsed vis-à-vis corn. Wheat and corn have not traded at the same price since 1996. A glance at a chart of the wheat/corn ratio paints a very clear picture of how far wheat prices have fallen relative to corn prices.
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.