Wheat rally juiced by global production drop

June 29, 2012 06:05 AM
Foreign wheat crops disappoint

Wheat prices, like the other grain markets, had an explosive rally over the past 10 days because of the oppressive heat in the U.S. Midwest. The big question is: How much of the spike is spillover from the corn pits?

 The U.S. winter wheat crop typically comprises about 75% of the total U.S. crop.The crop is planted in the autumn and harvested the following spring and summer.

As of the most recent crop progress report, 59% of the crop had been harvested, and by now that figure is much higher. Dry weather back in May is expected to have affected the crop to some degree, and the current heat wave will affect some unharvested wheat. Overall, though, the direct impact of the drought-like conditions on U.S. wheat is not nearly as disastrous as it might be for corn. The spring wheat crop has thus far been spared. The most recent crop condition report puts the good-to-excellent portion of the crop at 77%, which was actually up one percentage point from the previous week and higher than the 69% reading last year at this time.

The problems lie outside the U.S. Just about all major Northern Hemisphere producers are having supply issues with their 2012-13 winter wheat crop.

We’ve discussed the crop failures of FSU winter wheat crops in previous issues, and the estimates continue to slip. Output in the second- and third-largest FSU producers, the Ukraine and Kazakhstan, is expected to fall by a combined 16.85 million tonnes, or 37%, from last season. That’s not news. The USDA did not change those estimates from May. What is news, though, is that the inclement weather touched Russian growing areas, but, until recently, analysts did not expect much damage. That has changed. The June crop report slashed 3 million tonnes off the June estimate, to 53 million tonnes. Now private estimates have surfaced that cut an additional 3 million tonnes off the Russian crop. Total FSU output would be about 92 million, down from 117.40 million tonnes in 2011-12.

The USDA estimates that FSU exports will fall to 29 million tonnes, from 37.6 million tonnes last season. With the recent crop revisions, that may be wishful thinking.

Official Chinese government sources have volunteered information that disease has affected the winter wheat crop. The accompanying estimate says that crop will be about 2.3 million tonnes below previous estimates. That seems a tad optimistic. Some private estimates put the crop losses at a staggering 15 million tonnes below the USDA estimate, or 105 million tonnes.

The June estimate for global ending stocks slipped to 27.2% of usage, down from 28% in 2011-12 and 30% in 2010-11. If these revisions for Asian output are correct, we’re looking at a drop in inventories down to 24.5% of consumption. That would be the lowest carryout since the plunge in the 2006-07 and 2007-08 seasons to the 21% level triggered the massive bull market that sent wheat prices soaring to $12 per bushel and eyond.

The current estimate for 2012-13 Chinese imports is 2.5 million tonnes. China will not hesitate to ensure ample domestic supplies. Imports in 2011-12 and 2010-11 were 22 million tonnes and 13 million tonnes, respectively. Unlike last season, FSU export capabilities – as illustrated – are limited. The USDA estimate for U.S. exports for the new marketing year have not ignored this situation. The early forecast is 31.3 million tonnes, up from 28.71 million tonnes in 2011-12. We expect that estimate to grow.

In conclusion, the rally in wheat probably did get a boost from the hot weather in the U.S. Wheat fundamentals, however, are obviously independently bullish. Maintain long December wheat positions, as well as long September wheat/short September corn spreads, as per our June 7 recommendation.

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