Diverging Wheat Market Sentiment
Europe continues to garner attention thanks to extreme heat and the ongoing reduction in wheat production estimates. The key factor, however, is quality.
Ukraine’s percentage of this year’s harvest that will meet milling quality is somewhere between 30% and 45%. Last year, 55% of Ukraine’s wheat harvest met milling grade. The reason for the substantial decline is that combines were met with rainy weather, which damaged quality. Private estimates now put total production at 24.5 million metric tonnes (MMT), 1 MMT below the USDA’s current estimate.
Heavy rains also fueled a big drop in the French soft winter wheat crop, as estimates are now at 34 MMT, down from 36.6 MMT last year. But FranceAgriMer says that 91% of the wheat coming out of the country will have protein levels above 11.5%. Further, the group says that 35% of their country’s wheat crop sits between 12% and 12.5% protein.
Meanwhile, the German producers co-op DBV lowered its estimate of the nation’s wheat crop to 18 MMT, down 1.2 MMT from their estimate just 2 weeks ago.
Ultimately, the reserves of the world’s top wheat exporters are expected to fall to the lowest levels since 2007/08. This equates to just under 5 weeks worth of reserves from the major wheat players. This is critical not only for prices, but also for the geopolitical factor that makes wheat such a critical component of global stability. The last time that grain stocks were at this level, food riots occurred in Africa and parts of Asia.
According to the USDA, 2018/19 world wheat stocks will still be the second-highest on record at just under 261 MMT. The problem is that half of this inventory is locked up in China, and we know that the country isn’t going to start feeling charitable and release much of it to the global markets.
Something to also keep in mind is that Agritel is forecasting 2018/19 Russian wheat exports to fall to 31.5 MMT. This is a substantial decline from last year’s exports of 42 MMT as this year’s wheat harvest in Russia falls 21% roughly 67 - 68 MMT. Keep in mind as well that the USDA is currently estimating Russian wheat exports in 2018/19 at 35 MMT.
Thus, there’s a significant opportunity on the horizon for Canadian wheat to play a larger role in the global wheat market. With quality and quantity down this year in major competing markets, we’ve see basis levels across Western Canada continue to creep up. This is a trend that technically started at the beginning of 2018 but this has been augmented in the past 3 weeks since futures values have been whipsawing lately.
While combines are starting to roll, we’ve continued to see dryness across the Prairies, which has raised concerns about crop size. It’s mostly expected that quality will be there, but we might have to temper our expectations of premiums. Ultimately, given that Canada is looking the best in terms of quality out of the world’s major wheat suppliers, there’s certainly a noticeable disconnect between what’s happening on the futures market, and what’s actually happening on the likes of the FarmLead Marketplace and the broader cash grain trade.
President & CEO | FarmLead.com