By Gavin Maguire
CHICAGO, Jan 10 – U.S. wheat traders will have to navigate heavy cross currents in 2014 as a relatively bullish domestic balance sheet gets offset by an increasingly bearish global production outlook.
On the one hand, market bulls can take heart from the fact that brisk export sales coupled with declining inventories have pushed the U.S. wheat stocks/use ratio to six-year lows just as freezing conditions potentially damaged the emerging winter crop. But any traders who cast an eye overseas can easily perceive abundant supplies emerging from other large growers such as Canada and India that threaten to swamp the global market. As market focus will likely swing back and forth from domestic tightness to international surplus going forward, adeptly balancing these conflicting themes will be the key to success in 2014.
UPBEAT HOME FRONT
Looking at the U.S. wheat balance sheet and consumption pace alone, traders have reason to take a bullish view on wheat price potential in 2014.
Export sales since the start of the 2013-14 crop year have hit their fastest pace in years, and have already surpassed the 80 percent mark for the year as a whole with five months to go thanks to robust demand from China and Brazil in particular.
Estimates of year-end domestic wheat inventories, meanwhile, have declined by more than 14 percent since May as usage rates outpaced initial projections.
Combined, this robust sales pace and downward trend in stocks has steered the U.S. stocks-to-use ratio (a widely used metric of how much “slack” is embedded in a market) to its lowest level since 2008 – the year when U.S. wheat prices hit their all-time high.
But counteracting any bullishness stemming from the relatively upbeat U.S. scenario is an increasingly abundant global balance sheet straining under record output from Canada and ample supplies in India and Australia, which look set to fuel a record amount of world wheat exports in 2013-14.
BIG CROPS GET BIGGER?
An old grain trader adage, the term “big crops get bigger” refers mainly to the tendency for crop estimates to climb over the final months of a favorable growing season. This is usually due to the fact that crop assessors are typically conservative by nature and are usually reluctant to lift crop-size projections too much over a short period for fear of overstating actual supplies.
The recent Canadian wheat crop is a good example of that phenomenon, as the U.S. Department of Agriculture repeatedly lifted its crop estimates since July from 29 million tonnes to 37.5 million tonnes in its most recent report. An additional lift in that estimate is expected by many by the next USDA crop report.
U.S. and world production estimates also swelled over the past few months, fostering a generally bearish mood in the market by giving the impression of abundant stocks emerging from all corners of the world.
But such a mindset leaves the market open to being shocked by even a modest reduction in estimated supplies, which cannot be ruled out given the recent harsh freeze across the U.S. Plains, which is estimated to have damaged more than a million acres of wheat as it headed into winter dormancy. In addition, question marks remain over the scale of Argentina’s recent crop, and whether the government there will take steps to control the exit of grain from that country amid food inflation concerns.
Less than perfect growing conditions in Kazakhstan, Russia and the Ukraine also open the door to production reductions from that region, which could easily offset any further upward adjustments in areas where larger-than-expected crops were harvested.
Should global wheat crop estimates start to contract going forward, traders may start to interpret the relative tightness in the U.S. market as a reason to expect higher prices.
But with a number of major exporters likely to land near-record sized crops this year the wheat market may have a tough time sustaining any large price rallies until there is a more uniform contraction in projected supplies across all major regions.