Wheat surplus may drop, boosting prices in 2017

Wheat futures are edging higher in early 2017, and the crop has generated some market talk.

The gist is that wheat prices have been in the doghouse for so long that they might be due for an improvement.

There is some reason for this hope, but the crystal ball view is clouded by a lot of conflicting data.

Dry weather in the U.S. southern Plains, where hard red wheat is grown, has wheat condition reports for Kansas and Oklahoma well below where they were last year.

Cold temperatures have pushed south into the U.S. southern Plains and into Eastern Europe, raising the potential for crop damage in areas where there is no protective snow cover.

However, wheat is resilient, and a good spring could offset any current problems.

U.S. winter wheat acreage is likely down. The U.S. Department of Agriculture today issues the results of its first farmer survey of seeded acreage.

U.S. winter wheat yields in 2016 were spectacular, up 30 percent from 2015, making up for the nine percent decline in seeded area.

This year analysts expect another cut in seeded area, down about eight percent to around 33 million acres.

Given an acreage decline, and if yields fell back to the recent average, there should be a significant decline in U.S. wheat production.

That would support wheat futures prices, but although wheat traders focus a lot on developments in the United States, they don’t ignore what is happening worldwide.

The cut in U.S. wheat acreage will likely be offset by an increase in winter wheat seeded area in Russia and North Africa, according to the International Grains Council.

So it is really hard to forecast what global wheat production will look like.

Also, the global wheat carry-in to the 2017-18 crop year will be record high at 252 million tonnes, according to the USDA.

Global wheat demand is almost 740 million, so the stocks-to-use ratio is forecast at about 34 percent, well up from 26 percent five years ago.

That would appear to be a negative for prices, but if you dig into the numbers, you see that almost all the increase in global wheat stocks in recent years has occurred in China, although rising U.S. stocks have also been a factor.

China’s stocks of 112 million tonnes are more than double what they were in 2012-13.

China does not traditionally export wheat, so unless they change that policy, their stocks are almost irrelevant to the actual wheat market.

If you remove China from the global stocks-to-use calculation, you find that the ratio has been little changed during the past five years, ranging from a low of about 22 percent to a high of 24 percent.

The ratio for this year, excluding China, is 22.6 percent.

That is still a comfortable supply, but not the disastrous burden implied by the global number that includes China.

I mentioned that wheat stocks in the U.S. have also been an issue. Looking exclusively at the U.S., its stocks-to use-ratio has risen to about 50 percent. Its strong dollar has discouraged exports, causing stocks to climb.

If American growers reduce production as expected, that ratio would likely drop under 40 percent, which is a much less burdensome number.

There is nothing in this data to support a rip-roaring rally, but the 2017 wheat market might be a little more upbeat than 2016.

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