Falling stocks-to-use ratio | Cutting India and China out of the forecast suggests tight supplies
World wheat supply is a lot tighter than it appears at first blush, according to U.S. Wheat Associates.
The U.S. Department of Agriculture is forecasting the second largest world wheat supply on record in 2012-13.
However, a closer look at the numbers reveals “a more fragile wheat market,” said USW market analyst Casey Chumrau.
It appears there will be ample global supply when China and India are lumped in with the rest of the world.
However, while those two countries comprise 30 percent of world wheat production, they account for a mere one percent of global trade of the commodity.
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Taking production from those two mammoth producers out of the equation provides a picture of available wheat supply rather than total supply.
That picture shows that production in the five traditional wheat exporting countries and the three major Black Sea exporters, which together account for 88 percent of world wheat exports, is expected to fall three percent below the five-year average.
Meanwhile, consumption outside of India and China is expected to rise three percent above the five-year average.
“We have less wheat being produced but higher consumption,” said Chumrau.
That is reflected in the ending stocks-to-use ratio of 22 percent when excluding China and India, which is below the five-year-average of 24 percent. It would be the lowest stocks-to-use ratio for available supplies since 2007-08, when it fell to 19 percent.
A falling stocks-to-use ratio generally means higher prices.
Chumrau advised buyers to consider purchasing U.S. wheat today because any further restriction in supplies could considerably reduce the amount available to meet growing demand for the product.
“It’s definitely going to be something that will affect markets if we start seeing some supply disruptions,” she said.
Chumrau noted that Argentina’s agriculture minister has said the country is reducing acreage and Australia’s forecast is for a smaller crop than the last two years. However, there’s an even bigger risk in a more important production region.
“We’re really watching the Black Sea because we don’t know yet what the extent of their winterkill is going to be. We’re already getting indications out of those countries that their production is going to be lower than originally estimated.”
SovEcon, a Russian grain analyst, is forecasting 50 million tonnes of wheat production in that country, which is down from the USDA’s forecast of 53 million tonnes.
Ukraine’s national weather centre is forecasting 43 to 44 million tonnes of total grain production, which is below the USDA’s estimate of 45.8 million tonnes.
USW spokesperson Steve Mercer isn’t drawing parallels to 2010, but he said it provides a good glimpse of what can happen to wheat prices if Russia decides to ban exports because of inadequate supplies.
The USDA was forecasting 25 million tonnes of U.S. wheat exports that year.
“After Russia closed its doors, we ended up selling 35 (million tonnes). We were all shocked at the impact on price,” he said.
Mercer also pointed out the deteriorating condition of the U.S. corn crop. Wheat prices are heavily influenced by corn prices, and the corn crop is shrivelling in the field because of a lack of meaningful rainfall and high temperatures.
The USDA rated 56 percent of the corn crop in good to excellent condition as of June 25. That’s down from 77 percent six weeks ago, which puts the USDA’s forecast of a record 166 bushel per acre yield in jeopardy.
A smaller crop would push corn and wheat prices higher.
