Wheat prices took a breather last week after a nice rally that began in mid-September.
It seemed the limiting factor was the growing premium of wheat over corn. Wheat was rising because of production problems in several countries and strong U.S. exports, but a record U.S. crop weighed down corn. Production estimates are rising in the United States as the harvest comes in and many farmers are reporting better than expected corn yields.
There is the potential for a surprise about the size of the corn crop when the U.S. Department of Agriculture issues its supply and demand reports Nov. 8. It will be first report since September because the U.S. government shutdown prevented production of the October report.
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The corn-wheat price link is mainly related to livestock feed. Wheat will lose its place in livestock rations and be replaced by corn if it becomes too expensive relative to corn. The reduced demand then weighs down wheat prices.
However, there are supply and demand issues that will continue to stretch the corn-wheat bond.
International wheat demand has been robust.
Brazil has been buying lots of wheat in recent months because Argentina, its traditional supplier, has almost run out of supply after a bad harvest last year.
China has also been buying because rain hit its crop at harvest, damaging quality. The U.S. has got a lot of that business, but Canada also has a piece. Shipments to China in the first two months of the crop year were 204,000 tonnes, up from 58,000 tonnes last year in the same period.
While U.S. exports were strong early in the crop year they appear to be slowing and that might act as a drag on prices if that continues.
The next world crops to be harvested are in Argentina and Australia.
Argentina’s government has puzzled the wheat trade after issuing a crop estimate of only 8.8 million tonnes Oct. 18 and then announcing Oct. 21 that the estimate was wrong. It has not issued a new estimate.
The USDA’s September estimate was 12 million, but many analysts had expected a lower number because of dry weather and frost. However, 8.8 million was below all estimates.
Australia has had good growing conditions in the western part of the country but mixed conditions in the east.
Commonwealth Bank of Australia cut its forecast by 1.6 millions tonnes to 23.6 million tonnes. The official government forecast in September was 24.5 million tonnes.
Winter wheat seeding for the crop that will be harvested next year is progressing nicely in the U.S. and Europe.
However, excessive rain disrupted operations in Ukraine and Russia. Recent dry weather allowed seeding, and the situation is not as dire as it was a month ago.
However, acreage will be down from early projections.
China’s winter wheat zone has been dry during fall seeding.
Among this bullish news are bearish items.
India’s government is talking about increasing its wheat export subsidy. It has had good crops in recent years and the government buys wheat from farmers at higher than world prices. Stocks are now excessive, and it needs to sell some to avoid spoilage. However, it needs a subsidy to get the price down to match the world price for lower grade wheat.
An increase in the subsidy would put two million tonnes of low protein wheat on the world market.
Another potentially negative factor is the size of Canada’s crop. Most analysts believe farmers harvested more than the 23.8 million tonnes that Statistics Canada forecast in its September report.
The next report comes out in early December.
Currency markets are providing a helping hand to grain prices. The U.S. dollar recently retreated after rallying against most world currencies over the summer, and it now appears that the Federal Reserve’s stimulus program will continue longer than expected.
Also, Canada’s loonie is down now that it appears the Bank of Canada will not increase its interest rate.
Weaker currencies make grain appear cheaper to countries whose currencies are rising and therefore stimulate exports.
