Waiting for the Next Wheat Rally
On Thursday, July 11th, we got the monthly WASDE report from the USDA, but it didn’t really give us anything tangible. This is because everyone is waiting for the August WASDE report, in which the USDA will update their seeded acreage estimates from their self-admittedly inaccurate numbers in the June acreage report. I posited on social media that the USDA shouldn’t even have put out the July WASDE, given the garbage data that they were using (and yes, they have cancelled WASDE reports in the past). The USDA did, however, give some better demand expectations for U.S. wheat in the July WASDE, and so complex performed positively for the week.
It’s worth mentioning that both U.S. durum and spring wheat production will be lower than last year, thanks to a lower harvested area. For HRS wheat production, 542M bushels (or 14.75 MMT) forecasted for the 2019/20 harvest would be down nearly 8% year-over-year. With a durum production forecast of 58M bushels (or 1.579 MMT), this would be a 25% decline from last year’s harvest!
Overall, U.S. wheat yields were raised by 1.3 bushels per acre to 50, but some stronger demand, both domestically and internationally should offset the increase in production. More specifically, U.S wheat exports were raised by 1.37 MMT to 25.9 MMT. As such, 2019/20 U.S. wheat ending stocks were lowered by 72 million bushels (or 1.96 MMT if converting bushels into metric tonnes). There is some expectation that U.S. wheat will make up for lost business by Australia. While production was felled by 1.5 MMT, wheat exports for the Land Down Undaa were lowered by 1 MMT to 12.5 MMT. Also noticeable from the July WASDE was the downgrade of production in Canada, Russia, and the Ukraine, all because of hot weather.
Coming back to North America, despite decent progress for this year’s winter wheat harvest in the U.S. Southern Plains, quality is expected to be a bit variable. Kansas, which saw a lot of rain in June, will likely have lower protein, while Oklahoma missed a lot of the moisture and so protein should be average (cue the blending opportunities!). Despite the variable quality, the USDA is expecting average cash wheat prices in 2019/20 to be around $5.10 USD/bushel, slightly below 2018/19’s average of $5.20.
For Western Canadian farmers, the forecast for 2019/20 wheat prices is looking a bit like what we got last year as well. Based on the drought concerns in Australia and good demand into Asia, Canadian wheat is expected to continue to enjoy strong export volumes, with 2019/20 shipments expected to match that of 2018/19’s record of 19 MMT. This, however, will be depending on China continuing to buy Canadian wheat.
If you were thinking about locking in some new crop wheat prices, you a bit late to the game now. I’m looking specifically at October movement now, since you should only really be trying to fill contracts in September, not necessarily make new contracts. That said, the best basis for Western Canadian wheat prices was on June 3rd, which also coincided with the highs of wheat prices on the futures board. For CPS wheat prices though, the best basis was also the day of the best cash price, whereas the best cash price for HRS wheat was seen back in December 2018.
While by now you might be wondering if you should be growing more CPS, we do see some seasonal strength for wheat prices in the late fall and heading into the winter months. Without a major weather event though, we shouldn’t expect wheat prices to climb too much until this timeframce. One asterisk I’ll put here though is if we see corn prices start to take off due to production concerns in the U.S. if that happens, then wheat prices are likely to climb alongside it, at least a bit. This is because substitution effects will start to take over as wheat goes into feed rations instead of corn, and not just in North America, but potentially, worldwide.
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