Wheat Gains on Seasonality, Demand Updates
Wheat markets found gains in the second week of December, thanks to strong U.S. export sales and some changes in the December WASDE. Wheat also followed broader markets higher on the announcement that a “Phase One” deal between the U.S. and China had been agreed to. While the December WASDE basically fell on deaf ears, the Phase One deal announcement propelled gall grain markets higher. While the Chinese have reportedly agreed to an additional $200 Billion in purchase from U.S. agriculture, manufacturing, energy, and services sectors, a timeline was not provided as both sides felt it would inappropriately distort markets.
As I had suspected ahead of the December WASDE, the U.S. did update the U.S. spring wheat balance sheet, making some notable changes for hard red spring wheat but especially on durum. Given the carryover of supplies from 2018/19, HRS wheat imports were lowered by 5M bushels (or 136,000 MT) and durum imports were felled by 10M bushels (or 272,000 MT). Forecasted imports of all types of wheat by the United States is now pegged at 105M bushels (or 2.86 MMT), the smallest volume in nine years.
On the flipside, U.S. wheat exports (of all types), continue to track near their five-year average with nearly 12.8 MMT shipped out through its Week 27, good for a 21% increase year-over-year. While the USDA did raise their forecast for all wheat exports by 25M bushels to 975M bushels (or 26.54 MMT), this is only about a 4% increase from 2018/19, suggesting either the current pace will slow down, or the USDA will have to increase again. Of note though, the USDA did increase American HRS wheat exports were increased by 5M bushels to 260M bushels (or 7.08 MMT) while durum exports were increased by 10M bushels to 35M bushels for the full crop year (or 952,500 MT). The update to U.S. durum exports nearly halved U.S. durum carryout to now sit at 26M bushels (or 707,600 MT).
Looking globally, the USDA dropped both South American wheat production estimates, something most analysts were expecting. More specifically, Australia’s wheat production number was felled by 1.1 MMT to 16.1 MMT, which is 250,000 MT more than what ABARES said in their estimate 2 weeks ago. The lower wheat production number also meant the USDA lowered Aussie wheat exports by 600,000 MT to 8.4 MMT.
For Argentina, 2019/20 wheat production was dropped by 1 MMT to 19 MMT, while wheat exports were also felled by 1 MMT to now sit at 13 MMT. Challenging Argentine wheat competitiveness internationally will be quality, as just 1% of the crop is rated to be in good condition and none is excellent, a far drop from the 36% G/E rating a year ago. Through last week, only about one-third of the Argentine wheat crop had to be combined still.
Making matters worse for Argentine wheat exporters is higher export taxes. The recently-elected federal government there has hiked export tariffs on all agricultural commodities, including raising tariffs on wheat exports from 5% to 12%. This will likely impact Argentina’s competitiveness a bit on the international market. I think it’s Australia that will likely see the biggest impact on the export front, as, given domestic needs/prices, their final wheat exports number could easily drop below 8 MMT.
Here at home, CPS wheat prices are following winter wheat futures higher, with prices now sitting at crop year highs across the Canadian Prairies. Explicitly, this is an opportunity to make a cash sale before Christmas, especially if you look at how CPS prices traded sideways this time a year ago (see chart below). With CPS wheat providing a better return than HRS wheat in many areas, it’s likely that CPS will be seeded on more acres for Plant 2020, so maybe consider a 2020/21 sale as well before those premiums erode!
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