Ukrainian winter wheat crops in trouble

Focus on Futures : Wheat

Wheat Wheat

Wheat prices peaked nearly a year ago, but have been moving sideways since late last year. The market’s focus has shifted from worrying about Southern Hemisphere weather to Northern Hemisphere winter wheat crops.

The USDA April estimate for 2011-12 Argentinean output was 14.5 million tonnes, down from 16.1 million tonnes in 2010-11. Exports are expected to remain steady, though, at 9.5 million tonnes, the same as the previous marketing year.

Australia will harvest a record crop of 29.5 million tonnes, with exports jumping by 3 million tonnes, to 21.5 million tonnes. After trading down to fresh multi-month lows two weeks ago, old- and new-crop futures contracts bounced back into a well-established trading range (Chart 1). The supply side of the market will be determined by the success of Northern Hemisphere winter-wheat crops.

Chart 1: December Wheat

The March 30 acreage report showed that US farmers increased total wheat area for the 2012-13 crop (winter wheat that was planted last fall plus spring wheat that is currently being planted) by 2.7% over 2011-12. At 55.91 million acres, however, the forecast was substantially below analysts’ guesstimates of 57.42 million acres. Wheat prices rallied 45¢ per bushel on that news, but there was no follow through. The market proceeded to make new lows, as noted above.

A possible explanation is that while the planted acreage was a disappointment, the general outlook for the size of the crop has been mitigated by the potential for above-average yields. The most recent USDA crop progress report shows that the good-to-excellent portion of the winter wheat crop stands at 63%, compared with a dismal 35% at this time last year. This is not quite as good as, but roughly in line with, the condition of the 2010-2011 crop at this time two years ago, when final average national yields were a well-above average 46.3 bushels per acre (bpa). Last year, yields were 43.7 bpa. The average yield for crop years 2005-06 through 2009-10 was 43 bpa.

The progress reports are a bit dated, and more recently, weather has become somewhat of an issue, spurring some buying. Hot weather in the Southwest hard red winter wheat areas and a forecast for potential frost in the Eastern Midwest soft red winter wheat regions have captured the attention of wheat traders.

Of much greater concern, though, is the situation in the FSU. Inclement weather during the planting and growing seasons in Russia, the Ukraine, and Kazakhstan will slash output for the maturing 2012-13 winter wheat crops, particularly in the Ukraine. Russian officials still maintain that output will not decline materially, but that is questionable.

In the Ukraine, however, estimates have been reduced drastically. Official forecasts have not been released, but private analysts say that yield could be as low as 1.5 to 1.8 tonnes per hectare, down from 3.35 tonnes per hectare in 2011-12. Production could fall to between 11 and 14 million tonnes, down from 22.3 million tonnes in 2011-12. Domestic consumption has been between 12 and 13 million tonnes over the past few years. Maintaining exports at even the lowest level of the past few years would mean depleting all its carryover stocks.

The Ukraine issued export quotas in response to the crop failure in 2010-11, and it’s a sure bet that if the crop doesn’t improve, it will act again to ensure adequate supplies for the domestic market. The government already has stated that export quotas are not expected, but that is not realistic.

Kazakhstan is also a major export player, and its crop is estimated to fall to 15 million tons, down from 22.7 million tonnes last season. Although this does not pose quite the disaster for the export market as does the Ukraine, because domestic consumption is lower, it will still contribute to a lower pool of available supplies for world trade.

The US crop is obviously important, but the US is no longer the supplier of last resort. Aside from the drought-affected 2010-11 season, FSU exports have been roughly 35% larger than US exports since the 2008-09 season.

We believe there is an excellent, low-risk buying opportunity. Buy new crop December wheat. Place initial stops at $6.40 per bushel, close only.

About the Author
Sholom Sanik is an analyst with Friedberg Mercantile Group Ltd. He can be reached at ssanik@friedberg.ca
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