The USDA threw a curved ball at the wheat market last week when it increased, rather than decreased, estimates of global ending stocks in the September Report. The market had been expecting further downgrades on reduced production for countries like Canada and Australia, but instead other countries were upgraded, and ending stock estimates lifted by 2.33 million tonnes.
Overall production estimates were raised 3.37mt, despite 3mt coming off estimates for Canada and Australia. The real shock was adding 3mt back onto the Russian estimate, along with a 2.7mt lift for India, and another 1mt for Kazakhstan.
Not helping the cause was a lift in opening stock estimates, including another 500,000 tonnes onto Australian opening stocks, and a lift for Canada and the former Soviet Union block. The lift for Australia is being questioned, given the tightness in stocks on the east coast.
Although exports were lowered for Australia and Canada because of their smaller crops, imports were also lowered. That helped balance the numbers without having to factor in a shift in volumes needing to be exported from the US.
The market reacted by falling for two sessions mid-week last week, before staging a modest recovery on Friday night. The market did not quite take out the July low before recovering, but it was very close. It took the price fall from the high set on August 1 to more than 100 USc/bu, all the way back to below 500 USc/bu on the December contract.
Futures prices are still well up on where they were 12 months ago, and with a much lower dollar, A$ values of CBOT futures are even stronger, but the price decline since early August has set back the overall price level and expectations.
Overall though, nothing much has changed. Russian exports are dominating the sales and driving current global wheat prices. The US continues to be shut out of major export markets and export volumes are languishing. That has been the trend for some time, and prices will remain under pressure until it changes, and US exports gather pace.
There continues to be speculation about whether Russia will need to limit wheat exports. The official word is that there is not an issue yet, but sometimes actions speak louder than words with Russian protocols for export quality inspections are being tightened. This is seen primarily as a way of slowing the physical pace of export shipments and has been used in the past to help control exports and keep a lid on domestic prices. Tightening up on export quality inspections has also been a precursor to more direct intervention in exports in the past.
The USDA has left Russian wheat export projections at 35mt. Most analysts think that this is too high, and to be achieved will drive Russian stocks too low, resulting in a surge in domestic prices. If the analysts are correct, then there is more to play out in the story of Russian export volumes for this year.
The view remains that at some stage Russian wheat exports will slow, and global wheat prices will rally as a result. If this is late in the marketing year, it will coincide with peak seasonal production risks in the first half of 2019. With global stocks under pressure, the 2019 wheat crop cannot afford to slip further.
