Hibernating wheat bear may be shaken from its slumber

Lots of new crop production and demand data has come out in recent weeks giving a better picture of the global wheat situation and once all the numbers are tallied and digested, the new outlook is not much different than the old outlook.

Yet it was enough to remind the wheat futures trade, recently in a bearish frame of mind, that there are reasons not to be too comfortable.

In broad strokes, the reports show there is more wheat available but expectations on exports and consumption are also up, so the global year-end stocks forecast is slightly tighter than last month’s forecast, but the number is still considered burdensome.

Winter wheat crops in the ground in Russia and the United States entered winter dormancy in a fragile state but could still recover if they get good spring rain.

Let’s look into the numbers in more detail.

Statistics Canada on Dec. 3 pegged this country’s wheat production, spring and winter combined, at 28.6 million tonnes, about a million tonnes more than last year.

But wheat exports are going gangbusters, with slightly more than seven million tonnes already shipped to Dec. 6, week 18 of the crop year, according to Canadian Grain Commission figures.

That is 21 percent, or more than 1.2 million tonnes, ahead of last year at the same point.

So it not unreasonable to think that the increased exports will balance off the increased production, and so year-end domestic wheat stocks won’t grow much beyond last year’s 4.76 million tonnes.

A key reason for the big increase in wheat exports is the movement to China, the top buyer so far this crop year.

The latest Statistics Canada monthly trade report takes us to the end of October. In the August-to-October quarter of the crop year China bought more than 745,000 tonnes or almost 14 percent of all the wheat shipped.

That was up from only 279,000 tonnes in the same period the year before.

Stretching out to a global view, the U.S. Department of Agriculture’s monthly crop supply and demand update issued Dec. 10 revised the world’s production upward by 1.28 million tonnes to a record 773.7 million tonnes of wheat and durum.

This reflected increased estimates of the crops in Australia, Canada and Russia and slight trimming of the estimate for the European Union.

But the USDA also increased global consumption and trade.

As a result, it trimmed the global year-end stocks forecast to 316.5 million tonnes, down from 320.45 million in last month’s report.

However, the new number is still much larger than last year’s 300.6 million tonnes and represents a burdensome stocks-to-use ratio of 42 percent.

As many have noted before, China holds an oversized share of global stocks and distorts the supply picture.

But even when China’s numbers are removed from the totals, the stocks-to-demand ratio is still an adequate 25 percent this year, up from 24 percent last year.

By comparison, in corn, with China’s numbers removed from the totals, the stocks-to-use ratio is 11 percent.

The supply and demand reports were not much to build a rally, but other news emerged on the same day that reinforced upward pressure on prices

News emerged that Russian officials were considering a tax on exported wheat beginning in mid-February to keep more wheat at home and cool the increasing price of bread. Rising food costs during the economic turmoil caused by the pandemic are worrying the Kremlin and it is also considering ways to control sugar and sunflower seed oil prices.

It seems talk of Russia export curbs often arises around this time of year and many times it is much to do about nothing, although earlier this week it did exactly that. A tax issued in early 2015 did limit its exports and supported world prices.

This time, though, markets were further galvanized when, on the following day Russian grains analyst SovEcon issued a forecast for the 2021 wheat crop.

SovEcon sees only 76.8 million tonnes, noting the crop was in the worst shape since 2009-10 with 22 percent rated poor.

Its previous forecast was 79.2 to 82.8 million tonnes, noting increased planted acreage.

The SovEcon estimate is early. The crop won’t be harvested until next spring but if it holds true, it would be 8.5 million tonnes less than the 2020 crop, which it estimates at 85.3 million tonnes.

Dry winter wheat fields are also an issue in the U.S.

The USDA’s final wheat rating report of the fall issued Nov. 30 showed 46 percent in good to excellent condition, down from 52 percent last year and the 10-year average of 55 percent.

The amount rated fair was 36 percent, up from 34 percent last year, and the poor to very poor rating was 18 percent, up from 14 percent.

The 10-year average for poor to very poor is 10 percent.

But winter wheat is resilient and spring rains are the real determining factor for final yields.

All these factors helped wheat futures jump higher Dec. 9, 10 and 11.

But the strongest response was in the Chicago soft wheat contract, which has the biggest volume of trade and often reacts more to global conditions than the hard wheat contracts.

Chicago has had a rare premium over the Minneapolis hard spring wheat contract this fall.

Spring wheat rose only US14.5 cents while Chicago soft wheat rose 31.25 cents.

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