Tightening Up at the Crop Year’s Halfway Point
Wheat markets pulled back to start the month of February, driven by technical selling on the futures boards and some positioning ahead of the USDA’s monthly WASDE (out on Tuesday, Feb. 9th). Also weighing on the wheat complex were reports from private analysts out of China that there are new variants of the African Swine Fever (ASF) being found on pig farms, which could weigh on feed demand in the coming months.
Specifically, a Cofco Futures analyst said in their report last week that “the damage caused by the epidemic this winter was much more serious than last year.” They estimate that 20% of sows in northern China and 30% in the barns in some parts of southern regions have been impacted by the new ASF variant. Combined with high feed costs, this would obviously drive pork prices in China higher again, likely lead to some demand losses over the next 3 – 9 months, which also trickles down to weaker demand for feedstuffs.
This will have an impact on wheat as the USDA attaché in the People’s Republic reports that some feed mills “are substituting as much as 15% - 30% wheat for corn.” While we should continue to watch demand variables on the feed side of things, the USDA also notes stronger demand from the high-end bakery market, as importers are looking to source more low-gluten wheat. Thanks to the geopolitical tension between China and Australia, said buyers are looking to alternative origins, including Canada, the U.S., and France.
On that note, we know Canadian wheat exports have been very strong, with nearly 10.1 MMT of non-durum and almost 3 MMT of durum shipped out of the country through Week 26 (or the halfway point of the 2020/21 crop year). Combined, this is up about 27%, or 2.7 MMT, year-over-year, largely attributed to the non-durum wheat column, with 2.2 MMT more sailed than at the same point in February 2020. With this in mind, on Friday last week, Statistics Canada shared its estimate of grain stocks in the country as of December 31, 2020 and total wheat inventories are only down about 1 MMT, or 4%, year-over-year.
Breaking it down, commercial inventories as of December 31, 2020 are down materially from stocks held by elevators a year prior. From an on-farm perspective though, percentage-wise, the biggest year-over-year changes were in Eastern Canada, with stocks in Quebec and Ontario dropping by a combined 30%. From an absolute standpoint, Saskatchewan on-farm wheat stocks dropped by 680,000 MT, which more than offset the year-over-year increases seen in Alberta and Manitoba.
Based on the current, strong pace of the aforementioned exports, and healthy domestic demand (tracking 9% higher year-over-year for non-durum and 40% stronger for durum), there could be some significant changes to the next inventory report available from Statistics Canada, out on Friday, May 7th, 2021. If that report, which will show stocks as of March 31, 2021, has some bullish numbers printed, then it could put a greater emphasis on the importance of a decent 2021/22 harvest, meaning any weather premiums showing up at planting time could be amplified. Worth mentioning is the similar “tight stocks” sentiment emerging in the U.S. as well, especially considering the soybean harvest and second-crop corn planting in Brazil. Expectations going into the February WASDE are fairly bullish, in that both U.S. and global corn and wheat ending stocks are going to come in lower than January’s numbers.
Meanwhile, the Russian government is now tabling a new wheat export tax idea of €70/MT for any exported volumes sold at a price above €200/MT. At today’s exchange rate, this would equate to a tax of $85 USD/MT on prices above $245 USD/MT, or $109 CAD/MT on prices above $313 CAD/MT. Of course, this has pushed Russian farmers to start selling more of their wheat, given that, in addition to what they already pay the government, they’re going to lose about one-third of their gross income on exported wheat to this new tax! While I can only imagine what sort of reaction a similar tax would have here in North America, the punitive export tax from the Kremlin could theoretically make other wheat players (including Canada) much more competitive, price-wise, on the international market.
CEO | Combyne