Can Record Wheat Stocks be Bullish?
Last week’s WASDE report showed us that the USDA expects the world to have a record amount of wheat (316.1 MMT to be exact) still available by the end of the 2020/21 crop year. This, combined with an increase in the forecast of U.S. production, weighed pretty heavily on wheat prices last week and the sea of red on the futures board has extended into this trading week. But, the wheat harvest is far from in the bin and I want to look into why there are some bullish undertones to the complex today.
Wheat prices have already been pressured lately by the start of the northern hemisphere’s harvest and some bigger production expectations from the Land Down Undaa. On that note, in the June WASDE, the Aussie wheat harvest was raised by 2 MMT to 26 MMT, and exports by the same amount to sit now at 17 MMT. This would’ve more than doubled the 2019/20 wheat export campaign for Australia, had it not been for the USDA raising the 2019/20 wheat exports number by 1 MMT to now sit at 9.2 MMT.
Offsetting the increase in the wheat harvest estimates for the United States and Australia was downgrades for the E.U. (lowered by 2 MMT to 141 MMT of all types of wheat) and the Ukraine (dropped by 1.5 MMT to 26.5 MMT). The reason for the wheat harvest downgrades is squarely pinned on the hot, dry spring weather that most of the region experienced. Accordingly, EU wheat exports were lowered by 500,000 MT to 28 MMT, while Ukrainian wheat exports were felled by 1.5 MMT to 17.5 MMT. Put another way, available EU and Ukrainian wheat supplies will be tighter after the end of the 2019/20 crop year and, combined with the 2020/21 wheat harvest also looking smaller, this is a bit bullish.
This is important as drier conditions in the MENA region – Middle East / North Africa – means that their crops are looking a lot smaller, and as a result, will have to import more. Specific to North Africa, limited precipitation means that countries like Algeria, Tunisia, and Morocco will collectively make up the largest amount of wheat imports this year at 29.7 MMT. Morocco has already taken the rare step of exempting wheat import taxes through the end of the 2020 calendar year as they need to buy at least 5.8 MMT.
For Tunisia, wheat imports are likely to climb by one-third to 2.5 MMT while Algeria and Libya are in a bit of a bind, as weaker oil prices means less revenues to bring in foodstuffs like durum or soft wheat. The bottom line is that we’re going to need to see more of this weather-related demand to help buoy wheat prices through the usual downturn of the growing season. While the U.S. wheat crop year just flipped to 2020/21, the export charts are pretty empty, but Canadian durum and non-durum wheat exports continue to see a lift in movement, which isn’t usually the case for this time of year.
While the USDA kept the Russian wheat harvest at 77 MMT in the June WASDE, IKAR raised its estimate by 2.4 MMT to 78 MMT based on better yields than initially expected. Worth mentioning (albeit not super relevant in the global wheat trade game) is that India’s wheat harvest was raised to a new record of 107.2, a jump of 4.2MMT from the May WASDE report. Similarly, China is expected to hold more than half of all global wheat supplies by the end of 2020/21 (thus, somewhat nullifying the significance of a new record carryout!
Finally, in Ukraine, APK Inform is reporting that wheat prices there have jumped about $7 USD/MT since the start of June due to weaker wheat harvest results. While the Ukrainian government says that the 2020 wheat harvest could fall to 23 MMT – down about 20% from last year’s 28.3 MMT – based on preliminary combining, this number could drop lower. As a reminder, in last Thursday’s June WASDE report, the USDA said that Ukrainian farmers would take off 26.5 MMT, which was lowered from their May WASDE of 28 MMT.
Ultimately, we know general demand for wheat continues to be healthy (especially when compared to some of the other crops) and I’m not saying that wheat prices are going to touch 2008, 2012, or 2016 levels. However, this is a year where a downgrade to the wheat harvest – be it Ukraine or Canada – could have an amplified effect on the market, because of said demand. Thus, I’d encourage you to think about what realistic price target you’re looking for on that next old or new crop wheat sale, and share that expectation just once on Combyne by Listing it here (versus repeating yourself over and over again on multiple prospecting phonecalls).
CEO | FarmLead
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