Previous World Market Updates have touched on the world being awash with wheat. They have also touched on northern hemisphere crop volatility, the time of year when crops in the northern hemisphere are exposed to unpredictable growing conditions. This month’s World Market Update will focus on the increasing concerns in quality for the world’s wheat crop and the effect it is having on price.
CME Soybeans, Wheat & Corn Thursday, 16th June, 2016.
Key USD/per bushel: soybeans = $11.50, wheat = $4.75, corn = $4.29
Over the past six weeks, global wheat, corn and soybean values have soared. The rally was initially triggered by issues in South America, such as excessive rain on Argentinian soybean crops at harvest, and a hot dry finish to the first Brazilian corn crop of the season. Consumers and short traders who were waiting for off the header South American grain, found the supply to be slightly disappointing. This pushed export business back to the US causing larger than expected export figures and triggering the Chicago Board of Trade (CBOT) rally in corn and soybeans. This rally carried the price of wheat upward with it.
As an easy to follow rule, excess rain can increase yield. As an extension to this rule, excess rain can wash away protein.
Currently EU, Russia, Ukraine and US Winter wheat are in harvest. The US winter wheat looks very good, Ukraine is rebounding from the poor start they had to their season and the Russian crop just keeps getting bigger. The real issue lies in French wheat. Excessive and continuous rain in Western Europe is increasing these quality concerns. As a result, French wheat futures have rallied to a near 6 month high. The French wheat crop has dropped from more than 90% of the total crop being classed as good to excellent, down to 79% in recent days as a direct result of this rain. It is anticipated that much of the French crop will be feed quality.
Russia and Ukraine wheat production is expected to come in at 87MMT, 63MMT from Russia and 24MMT from Ukraine. These two countries are producing over 12% of the global wheat crop resulting in another expected strong Black Sea export season.
Closer to home, ABARES is predicting an increase of 2.5MMT for the 2016/17 winter crop compared to the 2015/16 season. The current El Niño pattern has broken down. The Bureau of Meteorology are predicting a 50% probability of entering a La Niña phase. If that were to occur, Australia has an increased probability of receiving higher than average rainfall along the East Coast, and less than average rainfall in Western Australia. This could result in a lower protein but higher yield year on the East Coast of Australia.
The global corn balance sheet is beginning to paint a bullish story. Production downgrades in South America and the global carry out being held in an often unclear China puts more pressure on this summer’s US corn production. Any types of failure in the US will dramatically impact the global balance sheet for corn.
The USDA has global wheat supply pegged at 730MMT versus global demand at just over 715MMT, putting the stock to use ratio at 36%. Despite global quality concerns, wheat is fundamentally bearish and will rely on the other commodities, such as corn and soybeans to maintain the upward tone.
With the bullish complex in US corn and soybeans along with the current price spreads, wheat should be fairly well supported. Indonesia is currently one of the biggest importers of wheat in the world. There is talk they will increase their imports of wheat by 50% this year over corn to feed livestock. If other countries follow this trend we will start to see oversupplied global wheat stocks drawn down.