The corn and soybean markets have grabbed all the agriculture-related headlines lately. But what about wheat? Well, at least as far as the US is concerned, there hasn’t been too much to say. Wheat crops escaped the drought. For that matter, the August USDA crop report revised the size of the US crop upwards, by 1.2 million tonnes, to 61.73 million tonnes. Farmers increased wheat acreage to produce the largest US crop since the 2008-09 season. The winter wheat harvest is complete and 89% of spring wheat has been harvested.
Nevertheless, wheat prices have rallied by close to 40% since early June — about the same as soybeans. Foreign producers, particularly in the FSU, suffered from drought as well, and produced some dismal results.
The crop report cut a further two million tonnes off Kazakhstan output, to 11 million tonnes, but raised the estimate for Ukrainian production by the same amount, to 15 million tonnes. That compares with crops of more than 22 million tonnes for each of these countries in 2011-12. This was not news, though, because the first estimate for global crops back in May already acknowledged these potential crop losses, and the estimates have not changed much since.
Many analysts, including the USDA, had an artificially high number for Russia, but the estimates are now tumbling. The August crop report slashed six million tonnes off the Russian estimate, to 43 million tonnes, down from output of more than 56 million tonnes last year. More recent estimates by some private forecasters put the crop size as low as 39 million tonnes. Using the lower estimate, total FSU production will be 80 million tonnes, down 30% from 2011-12.
EU crops were affected as well, but by a much smaller margin, at least in volume terms. Total output is expected to fall by about four million tonnes, or 3%, from last season. The problem with EU crops is quality, which means that a significant percentage of the crop will only be suitable as animal feed, leaving a tight market for milling-grade, food-quality wheat.
Indian crops continue to improve. The estimate was revised up by three million tonnes, to 94 million tonnes, up from 87 million tonnes last year. The excellent Indian crop, however, does little to mitigate the overall picture.
Global output is estimated to drop to 662 million tonnes, down 4.7% from 2011-12. Consumption is forecast to slip to 683 million tonnes, down only 1.7% from the previous marketing year. The resulting production/consumption deficit will draw global inventories down to 25.3% of usage, compared with 28.4% and 30% in 2011-12 and 2010-11, respectively. In the mid-2000s stocks fell to just shy of 20% of usage, so we’re not in such bad shape yet.
Argentinean farmers planted smaller acreage than last year, but that is well known and is in the market. The one area of vulnerability in the Southern Hemisphere is Australia, the world’s second largest exporter behind the US. Dry weather is threatening crops in Western Australia, the largest wheat producing region in the country. Estimates vary, but several million tonnes are at stake if the area does not receive sufficient precipitation over the next couple of months.
Demand has been sluggish, at least in terms of US exports. The USDA estimates that US exports will grow by 14% in 2012-13, but export commitments are behind last year’s pace by 12%. However, the market for million grade wheat from EU and FSU origins should tighten eventually, as illustrated above, at which point demand for US wheat should pick up steam and estimates will head toward the USDA estimate.
Raise stops on long December wheat positions, from $6.40 per bushel recommended on June 7, to $8.50, close only.
