Canada, Australia Wheat Crops Get Bigger
Last week, both Canadian and Australian government agencies raised their outlook for their respective nation’s wheat harvest. Combined with a bigger export quota from Russia, this extra supply put some heaving pressure on the wheat complex, dropping the futures boards by as little as a dime and as much as a quarter last week. It likely could’ve been more, if not for the strong export performance (and thus price strength) of corn and soybeans. However, the strong prices for commodities this fall pushed U.S. farmers to plant 31.5M acres of winter wheat according to IHS Markit, which would be a 1.1M-acre increase compared to a year ago.
While I’ll get to these updated supply numbers in a second, I want to illustrate just how unusual this year’s demand has been, especially from China. So far in the 2020/21 crop year, China has bought an incredible 11.2 MMT of U.S. corn, which Bloomberg reports is 14x more than pre-trade-war levels and officially means Mexico is no longer the top customer of U.S. corn. Further, China now accounts for one-third of all U.S. corn exports and 80% of American sorghum shipments and the trend is expected by many to continue for the rest of the crop year! For soybeans, with 30 MMT bought so far, China’s demand represents 57% of all American bean sales, and the most so far since 1991!
The point I’m making here is that all this demand has been a bullish surprise, and it’s trickled out into other areas, but low-protein / winter wheat seems to be the biggest beneficiary, given its substitution characteristics for corn in feed rations. China has also bought 1.7 MMT of U.S. wheat, way up from the 194,000 MT in bought by this time a year ago. That said, Russia says it has more wheat to go around, as the market is pricing in an export limit from January to June 2021 of 17.5 MMT, not the 15 MMT initially suggested.
This could likely put some pressure on Canadian and American wheat exports, which both seem to be slowing down. For example, U.S. total wheat shipments are now equal to what they were a year ago, while Canadian non-durum exports have had 4 straight weeks of lower shipments. However, with nearly 6.7 MMT exported through Week 17, Canadian non-durum wheat exports are still tracking 25% higher than a year ago, as well as the 3-year average.
In addition to Russia, there is also more wheat available for international buyers from Canada and Australia, compared to what official estimates said a few months ago in December. In the Land Down Undaa, some surprising yields helped raised total wheat production by nearly 2.3 MMT, making it the second largest wheat crop ever. Notably, in Eastern Australia, where most of their high protein wheat is grown, production literally doubled year-over-year to 13.2 MMT.
Comparably Statistics Canada said last week that there’s more than 1 MMT of wheat to go around: 680,000 MT of spring wheat and 437,000 MT of durum. Like Australia, the reason behind the production improvement is slightly higher yields (+3.8% YoY to 52.2 bushels per acre), and a slightly larger area that got harvested (+3.8% to 24.8M acres).
Overall, there are clearly some current supply headwinds for the wheat complex to deal with, but the demand function continues to be strong and hard to ignore. Further, La Nina watchers continue to point to limited moisture relief for crops in South America, as well as those winter wheat crops recently planted in the American Southern Plains (i.e. Kansas and Texas). Thus, if Brazil’s crops start to get smaller, corn prices having the potential to push up to $5 USD/bushel on the futures board, which means that low-protein wheat prices are likely to follow again, so watch for that next opportunity. For higher quality wheat, I’m watching for some similar follow-the-leader type trading, but I’m also aware of what any production shortfalls around the world could mean for the importance of Canadian supply availability.