The grain markets continue to operate in an information vacuum because of the partial United States government shutdown. While that is about to end, and presumably the USDA will release delayed reports at some stage, the market has missed critical monthly World Supply and Demand Estimates, US stocks reports, the US planted acres report for winter wheat, weekly export sales reports, and reports covering the open positions held by speculators.
As the reports are made available, we will see how close those who have been guessing the results will be. There could be some volatility as some in the trade adjust their positions quickly to cover what they think may have ended up being an incorrect call.
In the meantime, with little else to focus on, the monthly International Grains Council (IGC) report has filled the gap a little, particularly with their preliminary projections for the 2019/20 global crop. Last year global wheat stocks outside of China fell by 24.14 million tonnes (December USDA estimates). It was driven by the first drop in wheat production since 2012/13, and came despite two years of slightly declining consumption outside of China.
This year we would expect human consumption growth to see wheat consumption lift again, back towards long term trend growth. That means that to balance the books in terms of production and consumption outside of China, we will need to see non Chinese wheat production grow by close to 30mt, and to a new world record level. The chances of this happening are small, and so the probability is that key global wheat stock levels will continue to fall over the next 12 months.
Extrapolating this further, it should mean that the upward price trend now in place since August 2016 should be extended, giving us higher $A CBOT futures prices by the time we hit our 2019 harvest. It seems that the IGC agree with this view. They expect a rebound in wheat area, but when they apply average yields, their estimated production comes in with just a 14mt increase.
That will make the crop the third largest on record, but well short of the 2017/18 record crop. They are also forecasting a 6mt lift in consumption, driven by human demand, not feed demand. That will put further pressure on wheat stocks outside of China. The conclusion has to be that without above average yields globally, critical wheat stock levels will continue to decline, pushing us into a very tight stocks to use position.
When we start to get more USDA data, the market will absorb that against a backdrop of potentially tightening global stocks. The market will also begin to focus on weather as we come to the end of the northern hemisphere winter. Winterkill and frost risks will increase in the near term, and then soil moisture levels for the key growing season will be assessed, as well as timeliness of spring crop plantings.
The current forward market (CBOT futures through to new season cash prices in Australia) look too low against the backdrop of risks to production and likely stock reductions. The northern hemisphere growing season risks should see us looking at the best forward prices either during our autumn, or as has been the case in recent mid year price rallies, around the end of June and into July.
