CBOT wheat futures rallied as global and US wheat stocks were lowered in the February USDA Report. Extra fuel was added to the rally as speculative funds began to buy back large net sold positions.
March futures are at their highest levels since August, and are now close to 60 USc/bu above the lows set on 23 December last year. In A$ terms the market is up A$12.47 per tonne. The Australian dollar has risen 4.7 US cents since Christmas, pulling back the gains that have fed into our market.
Despite the lift in the A$ value of CBOT futures, our cash market has struggled to post gains on the pre-Christmas market at this stage. A couple of port zones are up modestly, but in many cases benchmark APW cash prices are within one or two dollars of the price levels seen just before Christmas.
The trigger for the reduction in stock levels in the latest USDA Report was a stronger pace of US exports. US wheat export projections were raised by 1.36 mill t, with a net 1.28 mill t coming off projected ending stocks for this year. This is a significant move. Any sustained recovery in US wheat futures will only occur if we begin to eat into US wheat stock levels, and this latest report seems to be saying that this could be underway.
Elsewhere production estimates were reduced, particularly in India where official Indian estimates had always run ahead of trade estimates. A 3 mill t drop in Indian production estimates fed directly into Indian, and global ending stock estimates.
Global stock estimates were lowered by 4.68 mill t on the back of a 4.45 mill t drop in the estimate for the global crop for the 201617 year. While this is an important move, it is a drop in US wheat stocks estimates that is going to drive a lift in US wheat futures, and therefore the price base for global wheat prices.
However, we are still seeing a 7.84 mill t lift in global wheat stocks year on year, and a lift of 4.46 mill t in the US. These ongoing high stock levels will keep any short term rally in check.
Looking forward, the market will focus more and more on the 2017 northern hemisphere season. A projected 17 mill t drop in production this year is likely to deliver us our first drop in global wheat stocks since 2013/14. As the market begins to focus on that, any weather issues in the next few weeks should generate additional risk premiums in the futures market.
What the commentators will still see though, is that global, and US stocks, will remain historically high even, with a drop in production of that magnitude.
So, once again it will come down to how much residual demand for wheat in global markets gets pushed back to the US. It may actually be more than currently expected. Stocks outside of the US and China are down 10.66 mill t this year. A drop in non-Chinese wheat production will put more pressure on that number.
Growth in US stocks are also likely to stall with a smaller US crop. If we then see more demand pushed back to the US as stocks outside of China and the US pull back to levels last seen in 2008/09, we will get higher wheat prices for our 2017 harvest. – Malcolm Bartholomaeus