For the most part, the devastating summer drought of 2012 left U.S. wheat output unscathed. Combined winter and summer wheat planted area of 55.7 million acres was 2.4% greater than in 2011-12, but production grew by 13.5%, to 2.27 billion bushels.
Regardless, wheat prices rallied to five-year highs. The driving force behind the spike to $9.50 per bushel was yet another FSU crop failure. In 2011-12, output recovered to 114 million tonnes from a devastating drought reduced the crop 81 million tonnes in 2010-11. The October USDA estimate for the 2012-13 crop was a downwardly-revised 77 million tonnes.
Prices have been in a holding pattern since July (Chart 1). The expectation of fresh supply from soon-to-be-harvested Southern Hemisphere crops and the promise of larger Northern Hemisphere winter wheat crops has consolidated prices.
In addition, apparent rationing of demand has set in. Consider that the USDA forecast for total 2012-13 U.S. exports is 32.66 million tonnes, which – if achieved – would be 14.4% above 2011-12 total sales. Trouble is, U.S. export commitments stand at 14.7 million tonnes, 9% below last year at this time. Nobody is buying.
The USDA estimate for global consumption is 680.66 million tonnes, down 2% from 2011-12. Output is estimated to fall by 5%, to 658 million tonnes, leaving a formidable production/consumption deficit and a drawdown in ending stocks to 25% of usage, down from 28% in 2011-12 and 30% in 2010-11. Despite the slide in the level of global inventories, the market can survive handily. We are still far from the danger zone seen in 2006-07 and 2007-08, when ending stocks fell to 21% of usage. Nevertheless, the market remains vulnerable.
As mentioned earlier, both the supply and demand sides must cooperate. Seeding of the US 2013-14 winter wheat crop is almost complete. The USDA does not release its first comprehensive winter wheat acreage estimate until January. Private forecasters estimate that US farmers will plant about 57 million acres of winter and spring wheat, roughly 1 million acres more than this past season.
The first problem is that the season got off to a weak start. The most recent crop progress report shows that only 39% of the crop is in the good-to-excellent category. That compares with 49% last year at this time and is the lowest early-season rating since the USDA began keeping these statistics in 1985. Of course, it’s still very early, and weather in the actual post-winter growing season is far more important.
FSU crops should bounce back, but the Northern Hemisphere crops are not available for six or seven months, so they should not really be a huge factor in the near term. The focus now shifts to the Southern Hemisphere, and the outlook does not seem to support ideas that those crops can alleviate tightness.
Argentinean exports for the 2012-13 marketing year are estimated at 5.5 million tonnes, compared with last year’s export sales, which reached 12.7 million tonnes. The key exporting nation has seen production fall into a precipitous decline. This year, excessive precipitation delayed the planting season. In 2010-11, output was 17.2 million tonnes, followed by 15.5 million tonnes in 2011-12. The October USDA crop report estimated this year’s crop at 11.50 million tonnes, but a Nov. 1 USDA attaché report lowered the estimate further, to 10.8 million tonnes. Some private forecasts put the crop as low as 10 million tonnes.
Australia is a vital exporter to the Asian market and is following a pattern similar to Argentina. Last year it harvested a record 29.52-million-tonne crop, but output is expected to fall sharply to 23 million tonnes. Here, too, more up-to-date estimates put the crop at 21 million tonnes.
The Ukraine announced an export ban that would commence on Nov. 15, but then waffled and said the ban was under review. In any case, the market is tight, particularly for food-quality milling-grade wheat.
Prices could be contained if demand remains as sluggish as it’s been. However, any return to normal consumption trends, which we believe is inevitable, leaves the market vulnerable to return to the dangerously low inventory levels we witnessed between 2006 and 2008.
December wheat closed below $8.50 per bushel twice in mid-October, which unfortunately triggered the stop on our long position. Reestablish long positions in March Chicago Board of Trade wheat, placing stops at $8.60, close only. Alternatively, buy March Kansas City Board of Trade wheat, placing initial stops at $9.00, close only.