The USDA released their monthly World Agriculture Supply and Demand Estimates last week, and wheat futures plunged by 19 USc/bu.
From the July high of 474.5 USc/bu, September wheat futures have now fallen 140 USc/bu, or close to A$80/t in a little over a month.
Wheat futures prices are now much lower than anyone expected, and having broken major price support on the charts, are not showing any signs of immediate recovery.
So, why has the market so suddenly gone against everyone’s expectations? One word. - Russia.
Last year Russia produced a record wheat crop of around 72.5 million tonnes, pushing their ending stocks up by close to 5m t. The chances of them repeating that crop were seen as small on the assumption that yields (i.e. weather) would return to normal.
So, Russia should have been contributing to the decline in global wheat production, and a major driver of the decline in wheat stocks outside of China and the US.
Not to be. We have had a hint that their season has been travelling quite well for a little while now, but against everyone’s expectations, the USDA confirmed that, and more, by lifting their production estimate by a massive 5.5m t in one hit. This year’s crop now stands at 77.5m t, up 3ml t on last year’s record.
Accompanying this lift in production is a further 4.5ml t lift in ending stock estimates. So Russian exports will lift by 3.7m t this year, and they will still end the year with more wheat stocks.
This is a game changer, and the market has recognised this. The reality is that Russia has been a major component of every sustained price rally, or price collapse, since 2007. That is going to be the case again this year.
This was always the problem with the mid year price spike this year. It was driven largely by the US, with some support from Canada and Australia, but there was no support from Russia at all. That was always a danger sign, but no-one projected such a massive one-off lift in production estimates that would be large enough to change the whole dynamic of the wheat market.
We now face the prospect of cheap Russian wheat being on offer for some time, with the prospect that their high stock levels will see that trend continue beyond this year, even if their production does pull back in 2018.
The other market movers from the USDA Report centred on US corn, soybean and wheat production estimates for the US itself. In each case production estimates have come in above expectation, confusing the market, and adding to weakness.
Since the July report, global what stock estimates have lifted by 3.58m t, and stock estimates outside of China and the US have lifted by 4.84m t. The year on year drop in wheat stocks outside of China and the US are now only set to fall by 3.22m t.
This is disappointing, and has trimmed at least $10 per tonne off end of year price expectations.