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.