A cock and a bear have moved into the bald eagle’s back yard and are eating its dinner.
The key news in the wheat market last week were sales of French and Russian wheat to buyers in South America, a market where the U.S. traditionally does well.
French and Russian grain sales to Latin America are rare, but they make sense in the current economic and currency exchange rate situation, analysts say.
“The main causes for it are largely related to the exchange rates, especially the euro,” said Bruce Burnett, head of the Canadian Wheat Board’s market analysis department.
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“As you can imagine, that’s not something that typically happens.”
Many unusual factors are combining to lure European wheat into Latin America, including the low euro, high U.S. cash prices for wheat and low ocean freight.
The low euro makes American wheat seem more expensive than European wheat in many buyers’ eyes. High U.S. cash prices provide no incentive for Latin American countries to snap up large supplies of U.S. wheat. Low ocean freight rates mean distant supplies can be brought in affordably.
Canadian wheat faces a similar plight, with a strong loonie boosting the relative cost to foreign buyers compared to discounted European wheat.
The March Canadian Wheat Board Pool Return Outlook for 2010-11 slashes wheat prices by $14 to $16 per tonne across all classes, or from $6.42 per bushel in-store at port to $6.04 for No. 1 Canada Western Red Spring wheat with 13.5 percent protein. The PRO for 2009-10 – the crop currently in store – has dropped only about $4 to $6 per tonne or from $6.64 to $6.48 for CWRS 13.5.
The unusual combination of factors pushing European grain to Latin America suggests that this phenomenon won’t continue long, said Joe Victor of Allendale, Inc., in McHenry, Illinois.
“We don’t believe a trend is developing,” said Victor.
Some time soon, U.S. wheat prices will have to fall in order to be cleared, and when that happens, the Latin American market will come back, he said.
“We’ll have to face reality that we are still 40, 45, maybe 50 cents per bushel higher on our wheat (than is competitive with) French wheat,” said Victor.
Huge supplies of wheat are glutting the world’s stores, putting downward pressure on commercial prices. But U.S. futures and cash prices have held up more firmly than world prices, so U.S. exports are sagging. Positive carrying charges in the U.S. market dim the urgency to lower prices to make sales.
Victor said the U.S. will likely post its lowest exports for decades, leaving huge amounts in store. Typically 48 percent of U.S. wheat is exported, but this year that may fall to 37 percent.
Victor said the unique combination of factors now causing French and Russian wheat to flow to Venezuela, Brazil and Mexico will unwind, but the long-term trend for U.S. wheat production is bad.
“We’re not a nation that needs to produce so much wheat,” said Victor.
Not only can the rest of the world produce large amounts of soft and hard red winter wheat, but American farmers will have better paying crops. Corn and soybeans are spreading into all U.S. wheat areas, and sorghum is pushing into Kansas, Oklahoma and Texas.
Victor said the U.S. livestock industry will likely grow and export meat, rather than the grain industry expanding exports, so today’s winter wheat producers may become tomorrow’s feed grain producers.
One good factor for future Canadian grain sales, Victor said, is that far fewer parts of the world can produce top quality spring wheat. The Dakotas and Western Canada are likely to competitively produce and export wheat, while the U.S. winter wheat export trade disappears.
“It’ll be the spring wheat that gets all the attention,” said Victor. However, it will probably become more like a contracted, high quality product than today’s bulk commodity.
“Give it five or 10 years, wheat ends up going to more of an oat type market,” said Victor.
