Growing U.S. stocks pose wheat market’s biggest problem

Canada will likely export more wheat than the United States for the second consecutive year.

That is just one development in a depressed wheat market fixated on large supplies. However, the supply, while large, is not necessarily as overwhelming as it appears on first glance.

The difference between ample supply and shortage is fairly small, and the wheat market orientation can change rapidly from comfort to panic.

Today’s wheat stock scene is greatly influenced by the wheat export situation, which is off balance because of the dominance of the strong American dollar.

Stocks are not much of a burden outside of the U.S. in the traditional exporting countries — the European Union, Canada, Australia and Argentina — and the Black Sea exporters — Russia and Ukraine. The reason is that they all have relatively weak currencies and are capitalizing by underpricing the U.S.

For the second consecutive year, the EU will be the leading exporter with expected total shipments of 32.5 million tonnes.

Russia will be the second place exporter followed by Canada. Next come the United States, Australia and Ukraine. Argentina comes in a distant seventh.

The reporting on the U.S. Department of Agriculture’s monthly supply and demand report Feb. 9 focused a lot on the expected increase in domestic and global ending stocks.

The global carryout rose to almost 239 million tonnes, up 11 percent from last year and a record large amount.

It is equal to 122.6 days of global consumption.

However, the global number masks the fact that the real buildup in stocks is happening mostly in just one country: China.

China holds 39 percent of world wheat stocks and 53 percent of its corn stocks, based on USDA estimates.

I’d argue that rising wheat stocks in China don’t mean much to the market. They are tied up there. China does not import or export wheat in any meaningful way.

The Chinese government wanted comfortable grain stocks to provide a cushion if it ever has a crop failure, but it has come to the conclusion that the stocks have grown beyond any rational need.

Beijing is now revamping its farm assistance programs to try to tie production to market needs.

The year end stocks situation does not look as bad when China is taken out of the equation.

The focus returns to the buildup in the U.S., where the carryout has risen from 16.1 million tonnes two years ago to an expected 26.3 million this year, the most since 2010.

Unlike in China, this grain really matters. It is available to the world market. The world’s main wheat futures exchanges are in the U.S., and traders pay close attention to domestic grain stocks.

To whittle down American stocks will require some combination of a weaker U.S. currency, lower American production due to reduced acreage or a weather problem, or some disaster in another major production region that forces buyers to turn to the U.S.

No one can predict what will happen in the coming crop year, but there are things to keep an eye on.

India might offer the best hope for a new demand factor. Its winter crops are struggling after two disappointing monsoon years and an unusually warm winter.

Wheat production there might fall as low as 84.5 million tonnes based on the median of estimates from seven analysts polled by Bloomberg News.

That would be down about five million tonnes from last year and down 10 million tonnes from two years ago. It has stocks, but it is not clear what shape they are in.

There is talk that the country might have to import a record amount of wheat.

India does not normally import wheat, but in 2006-07 it bought 6.7 million tonnes after a bad harvest. If its imports got to that level again, it would help to trim global stocks.

North Africa’s crops are also struggling, and the region might have to step up imports

As for production prospects, we know that there was bad weather last fall in Ukraine and its wheat crop was seeded on fewer acres. Part of what did get seeded was in bad shape going into dormancy.

Spring weather will determine how much survives into harvest.

There are no big weather worries yet affecting winter wheat in the U.S., Europe, Russia or China.

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