Market digests record wheat crop

18 Sep, 2015 02:00 AM
What the estimates do is push us very much towards our worst case scenario for this year

DESPITE the lift in CBOT wheat futures after the release of the September USDA Report, the report was actually quite bearish for wheat.

The rally was on the back of corn, which lifted as the USDA reduced corn production in the US by more than expected, which came on top of downgrades for the European corn crop.

Once we get clear of the impact of corn, and wheat begins trading its own fundamentals, we are likely to see some downside as the market digests a third record wheat crop in a row, and a year on year lift in wheat stocks, on almost all ways of measuring stock levels.

Estimates for global production lifted by 5.06 million tonnes as increases for the EU were fed into the numbers. Rather than a large year on year drop in wheat production in the EU, the projections are now within 2.3 million tonnes of last year’s record. This pushes global production up 6.37 million tonnes year on year.

Ending stocks globally are set to close on 226.56 million tonnes, up 15.25 million tonnes. Most of that is within China, but when we drop China out, stocks are still rising 550,000t over last year. That might not be a lot, but it is a 5.09 million tonne turnaround from last month’s projections, and takes us from a modest year on year fall, which may have supported wheat prices, to a small rise.

Also bearish is an increase in projected ending wheat stocks for the US. Year on year they will rise by 3.3 million tonnes, with a 690,000t lift to the projection this month, as the USDA wind back their expectations for US wheat exports.

That does leave stock estimates excluding the US and China still falling year on year by 2.78 million tonnes, but this is the only positive in the numbers, and the extent of the fall has been sharply eroded with these latest numbers. In the current environment where export sales are slow, a drop in this measure of wheat stocks may not be able to support the wheat futures market.

What the estimates do is push us very much towards our worst case scenario for this year, which was a small year on year increase in critical global stock levels, and no drought in Australia pushing basis levels down, to trigger a significant year on year decline in wheat prices by the time we hit our harvest.

From here we would expect that the worst of the news on global production and stocks is in the market. It is hard to see where ongoing increases in production estimates will come from. That means the market will focus more directly on export sales, who gets the business, and at what price.

So far the pace of export sales from the EU and the Black Sea are well down on this time last year. That leaves them to fight it out for longer yet, and is behind the revision down in US export expectations.

At this stage it looks as though importers will hold back on buying against any price increases, and help perpetuate the race to the bottom for wheat prices in global markets. However, this will not fix the looming tightness in milling wheat stocks, and supply of wheat at high enough proteins to match Middle East demand. This may be supportive in early 2016.

Malcolm Bartholomaeus is the market analyst for Bartholomaeus Consulting, Clare, South Australia.

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Jock Munro
18/09/2015 4:21:17 AM

In other words the buyers are sitting back and hoping that the price will drop further! Deregulation is a fraud- there is no organisation out there to protect Australia and its growers' interests.
18/09/2015 6:40:42 AM

Don't think anybody really believes there is as much grain in the world as the USDA and IGC clowns lie about. The real problem for prices is the ability of printed money to be used to short commodities and manufacture deflation. It's bad enough printing money, but to then allow selling of something you don't have is a destructive market force.
18/09/2015 6:46:34 AM

@Jock Munro: So, just rein in the market and impose a price. It worked so well for woolgrowers ...
Jock Munro
18/09/2015 10:53:23 AM

The wheat industry's arrangements were different to those of wool- perhaps you should do some research.
19/09/2015 11:17:04 AM

Now you've really got me confused D8, are you just being facetious or , after all your previous posts supporting futures and forward selling, are you now saying this sort of behaviour distorts reality? I completely agree with you on the printing of money , by the way, this is only deferring the problems we face and undermines the assets of nations pursuing such policies
21/09/2015 5:58:45 AM

Short selling funded by printed money where the objective is price suppression is possible in this world. It is occurring across the entire commodity index right now. When the money is printed, losses are not really losses. When you grow grain, losses are real. It's also one of the reasons why basis is positive for most commodities too. Basis cannot be manipulated directly.
22/09/2015 9:30:16 PM

losses are definitely real when you are growing grain if you aren't producing what you have sold. The principle is the same whether it is grain or money that is being traded and it all distorts markets and allows speculators a look in


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