While most commodities have been falling to multi-month or multi-year lows, the wheat market bucked the trend and went on something of a wild bender. In mid-May wheat prices rallied by over $1 per bushel in the space of just five sessions. The rally came unglued over the next two weeks, erasing just about the entire advance (Chart 1).
The reason for the rally was a series of production-related problems for both maturing Northern Hemisphere crops and soon-to-be planted Southern Hemisphere crops.
Very hot weather and strong winds in the US Plains suddenly threatened what was expected to be a bumper crop. The most recent USDA weekly progress report shows that the good-to-excellent portion of the crop fell to 52%, from 54% the previous week. Just a few weeks earlier, that figure had been 60%.
The news from the FSU wasn’t really news at all. Drought and frosts wreaked havoc with wheat crops, particularly in the Ukraine and Kazakhstan well back in February and was documented in Focus on Futures on April 30.
Recent estimates put the 2012-13 Ukrainian crop as low as 12 million tonnes, down from 22 million tonnes in 2011-12. That’s below the USDA May estimate of 13 million tonnes. The USDA estimates that exports will fall by only 1 million tonnes, to 4 million tonnes. For that matter, the Agriculture minister claims that exports will remain at last year’s level. Last year’s domestic food and feed usage was close to 15 million tonnes. Supplies for the domestic market will have to be compromised to accomplish maintaining exports at any level. That is one possibility. The other is that the government will restrict exports – although government officials say they intend to honor all export commitments.
The USDA estimates Kazakhstan production at 15 million tonnes, down from 23 million tonnes in 2011-12. Exports are estimated to fall by only 2 million tonnes, though, to 8.5 million tonnes.
Maintaining historical export levels helps to stabilize global markets. The depletion of ending stocks, however, may just be delaying a supply shock down the road if there is a weather-related crop failure in another major production/exporting region.
Yields in Russia are said to have been affected by the same weather patterns, but all analysts, including the USDA, estimate that total output was not impacted materially and that output will be the same as last year’s 56 million tonnes.
In the Southern Hemisphere, key exporter Argentina is reducing its wheat area by 17.5% over 2011-12. Farmers have been shifting to crops that are not vulnerable to export restrictions. To boot, estimates for the already smaller crop have been reduced due to poor planting weather.
A similar situation is developing in Australia as the planting season gets underway. Based on smaller wheat area, the crop was estimated at 26 million tonnes, down from 29.5 million tonnes in 2011-12. Dry weather now threatens yields, and early estimates have now fallen to 25 million tonnes.
The USDA’s first comprehensive look at the 2012-13 crop year accounted for most of the supply issues cited above. Global ending stocks are estimated at 188 million tonnes, or 27.4% of consumption, down from 28.4% in 2011-12 and 30% in 2010-11. That’s still a fairly well-supplied market when compared with global inventory levels that sank as low as 20% of usage in 2007-08 and that sparked the bull market.
There are supply problems or potential thereof in almost all major producing countries. We were stopped out of our long position in December wheat at $6.40 per bushel, as per our April 30 recommendation. That was the low. We still believe that this market has major upside potential. Buy December wheat and use the same stop. Alternatively, roll our highly profitable spread of long July wheat/short July corn to September.