Wheat: Boring...but, never sell a dull market short

The USDA was curiously optimistic in its monthly crop report. The average of analysts’ guesstimates for the winter wheat crop was just a tad under 40 million tonnes, below the May estimate of 40.5 million tonnes. But the actual figure came in at 41.1 million tonnes, surprising traders and sending new crop prices to fresh recent lows.

On May 29, Japan, one of the largest importers of U.S. wheat announced that it was canceling wheat shipments from the U.S., because of the discovery of illegal genetically modified wheat on an Oregon farm. Other importing nations, such as South Korea and Taiwan, soon joined the chorus and said they would be reviewing its U.S. orders until the situation is clarified. The media were quick to point out that the $8 billion U.S. wheat export market was at risk if mass cancellations should snowball. Monsanto, the producer of the seed in question, stopped field testing for this product in 2005, and it was never available commercially, so it was indeed a mystery as to how the seed ever surfaced. Farmers from as far away as Kansas initiated lawsuits against Monsanto, claiming that it tainted the reputation of U.S. wheat, and that as a result, they would suffer millions of dollars of lost revenues.

In the meantime, Monsanto tested 30,000 samples of seed spanning 60% of all farms in Oregon and neighboring Washington State and did not find any of the illegal seed. On June 14, the USDA confirmed the company’s findings that the only instance was the original discovery on the 123-acre farm in Oregon. Initially it seemed as though this could turn into a larger issue that would depress U.S. prices, but the most recent weekly export report showed a normal flow of new sales. A lot of noise, but a non-event.

Overall, the outlook for 2013-14 global production is not quite as exuberant as it’s been over the past few months. For the most part, output estimates for the major Northern Hemisphere winter-wheat-producing nations were revised down from their May estimates. EU production was lowered by 1.3 million tonnes, to 137.44 million tonnes, while the estimate for FSU output was cut by 4.5 million tonnes, to 102.59 million tonnes.

The estimate for global production was revised downwards by about 5 million tonnes, to 696 million tonnes, which resulted in a drop in the estimate for ending stocks to 26.1% of consumption, down from 26.8% last month. Global inventories have been in a downtrend since they peaked at 30.9% of usage in 2009-10. Nevertheless, we are still very far from the bull market years of the mid 2000s when ending stocks plummeted to 21% of usage. Unless fresh dynamics are introduced into the market – a crop failure or an unexpected surge in demand – we expect the market to continue to trade in the confines of recent ranges. One note of caution: Funds are heavily short the market and sentiment readings are at 52-week lows. While there is no compelling reason to be long, it would be downright dangerous to be short.

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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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