The July USDA Report held surprises for both wheat and corn, with lower than expected ending stock estimates for both crops.
Global wheat stock estimates were lowered by 5.28 million tonnes, more than 4mt lower than the market had been expecting. The decline was on the back of an 8.43mt downgrade to global production, with losses being recorded for Australia, Russia, Ukraine and the EU.
For corn, which is important for the wheat market as well, the USDA cut global stock estimates by 2.7mt, rather than the 1.6mt decline expected by the trade.
The negative to come out of the USDA Report was a further increase to US wheat stock estimates of 1.06mt. The carryout from the previous year was increased with exports falling short of projections, adding to a lift in production expected for this year. A lift in US export estimates was not enough to prevent US wheat stock estimates from being raised.
That said, US ending stock estimates are expected to fall by 3.15mt year on year, and any further decline in production estimates for other major exporters should see demand for US wheat take up the slack.
However, at this stage the USDA are not projecting a big lift in US exports. Year on year they are projecting a 2.63mt increase, but it will still leave US ending stocks at an estimated 26.8mt. While that is down from the 32.13mt stock level at the end of 2016/17, it remains well above the average stock level of 21.34mt for the period 2008/09 to 2015/16.
Accentuating the issue for the US is that production is pegged at 51.21mt. This is up 3.84mt on last year, but it is well down on the average US crop of 59.45mt for the period from 2008/09 to 2016/17. Basically, US production is declining, but that is not enough to drive US wheat stocks down to more realistic levels.
Wheat futures have reacted positively to the tightening global stocks position but is being held back by stubbornly high stock levels within the US. The large carryout stock levels in the EU and Russia from last year will continue to feed into global markets for much of the current year, shutting out US exports.
US denominated wheat prices still remain sluggish, and seemingly cannot factor in the underlying train wreck that we appear to be heading towards. That train wreck, unless diverted by exceptional global production in 2019/20, is the sharp decline in available stocks outside of China and the US.
The current USDA numbers are suggesting an 18.76mt year on year decline in stocks outside of China and the US, down to just 96.42mt, or just 16.07 per cent of current global consumption outside of China and the US.
That measure of wheat stocks to use has not been that low since well before 2003/04. On previous occasions a ratio that low has been enough to trigger a significant rally in wheat prices to trigger renewed production to rebalance the global balance sheet.
If we assume a recovery in global wheat production in 2019 as multiple regions emerge from this year’s droughts, we still only maintain the overall position against what, over time, is a steady increase in global consumption.
