Last week’s USDA Report gave the first estimates for supply and demand for the 2018/19 season. Global ending stock estimates for 2018/19 for corn, soybeans and wheat all came in lower than market expectations, but the same numbers for the US were all above what market watchers were expecting.
Grain prices have fallen since the report. In part this is due to fund buying drying up, after significant buying ahead of the report. We are also seeing planting progress being made for US spring crops, while some rains are expected in drought areas of the Hard Red Winter wheat belt in the US, and across dry areas in the Black Sea region.
For wheat the direction has been down, both before the USDA Report, and after. From the peak in prices on May 3, the CBOT July wheat futures contract had shed just over 50 USc/bu, or close to A$24 a tonne.
On the face of it the USDA Report should be supportive of wheat based on falling global stocks, but the market is reacting to larger than expected US production and ending stock estimates, and to the reality that global stocks will still be the second largest on record.
Without immediate support from the supply and demand numbers, the market has reverted to watching the weather. However, the numbers published by the USDA show a potential sleeper, which when awoken should trigger a sharp price rally.
Global stocks are forecast to fall by 6.13mt year on year. This is more than pre-report surveys had indicated but leaves stocks at 264.33mt, the second highest on record. It also includes 138.62mt in China, which is effectively off the global market.
That’s where it begins to get interesting, because stocks outside of China are actually forecast to fall by 17.93mt, down to 124.2mt. That will become the lowest level of that measure of stocks since 2008/09. The stocks to use ratio excluding China is 19.47 per cent, the lowest since 2007/08.
Probably why this number is not getting much attention yet is because of US stocks. They will fall this year by a projected 3.15mt, but that only takes US stocks down to 25.98mt. It will be the fifth year in a row where US stocks have been above 20mt. The last year US stocks were at reasonable levels was in 2013/14.
If we go one step further, and look at stock levels outside of China and the US, we see stocks falling by 14.78mt, to 98.22mt. That is the lowest since 2007/08, and the stocks to use ratio of 16.19pc is the lowest at any time since before 2003/04.
So, the market is still being held back by perceptions of large wheat stocks. The reality is that those stocks are basically in China, the US, and the Black Sea, with the world market being very reliant on stocks from the Black Sea for the next year.
If the US crop is currently being over estimated, or production in the Black Sea is compromised, we are heading to a situation similar to that of 2007/08, when grain shortages sent wheat prices to extreme levels. Stocks won’t get as low as back then, but against much higher consumption, the stocks to use ratio outside of China would get very low.
