Wheat: Could a U.S. crop failure spark a bull market?

Focus on Futures: Wheat

The recently harvested Argentinean crop was much smaller than the 15.5-million-tonne crop harvested in 2011-12. While this has already been reflected in the USDA balance sheet, poor weather has resulted in recent additional downward revisions. The USDA lowered its 2012-13 estimate in the January crop report by 500,000 tonnes, to 11 million tonnes. In January, the agriculture ministry lowered its estimate to 10.1 million tonnes. Although Argentina is an important exporter, knowledge of its crop failure is in the market.

The saving grace for the wheat market has been the extraordinary Indian crop. Consider how quickly Indian farmers have expanded their wheat crops. In 2010-11 they harvested 81 million tonnes. Then in 2011-12 they topped that with output of 87 million tonnes, only to better that in 2012-13 with yet another record of 94 million tonnes. India has turned from being a self-sufficient supplier with negligible exports of below one million tonnes to being a key player in world trade with estimated exports this marketing year of 6.5 million tonnes.

The estimate for 2012-13 global ending stocks stand at 177 million tonnes, or 26% of consumption, little changed from the previous month’s estimate. That compares with 28% for the previous marketing year and 30% in 2010-12. Assuming the forecast for lower demand holds, it can hardly be considered a tight market. The mid-decade bull market began with global inventories at 20% of usage.

One variable, as mentioned, is whether demand is as weak as estimates say it is. In early December, already well into the wheat marketing year, which started on June 1, U.S. export commitments were running 10% behind year-ago levels. As of the most recent weekly export reading, that gap has narrowed to only 3.5% below last year at this time. The USDA is forecasting that annual sales will be equal to last year’s, at 28.5 million tonnes. If foreign sales continue at the accelerated pace, the USDA may have underestimated global demand.

The other factor is the health of 2013-14 crops. The Northern Hemisphere, Europe, and the FSU are coming off a devastating drought that slashed crops last year, but early estimates are for a return to normal crop sizes. Ukraine, for example, a key exporter, is set to bounce back with a wheat crop of 20 million tonnes, after last year’s drought-trimmed 15.5-million-tonne output.

Indications are mixed. Remain sidelined.

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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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