Wheat prices pressured by bearish U.S. and world supply-demand outlooks

by Jay Sjerven
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Wheat futures prices held near contract lows.


WASHINGTON — Wheat futures prices held near contract lows, in instances, near multiyear lows, in the wake of predominantly bearish U.S. Department of Agriculture August production and supply-and-demand forecasts issued on Aug. 12. Market analysts interviewed by Milling & Baking News could find few features capable of rallying wheat prices in the near term as the U.S.D.A. raised its forecasts for both U.S. and world wheat production, and hiked its projections for U.S. and world 2014-15 wheat ending stocks.

The widest adjustment from the U.S.D.A.’s July wheat outlook was the large increase expected in world wheat production. The department forecast world wheat production in 2014-15 at a record 716.09 million tonnes, up a whopping 10.92 million tonnes from the July projection and up 2.02 million tonnes from 714.07 million tonnes in 2013-14, the previous record.

The U.S.D.A. raised its production forecasts for Russia by 6 million tonnes and for Ukraine by 1 million tonnes. Because of the larger supply, Russian 2014-15 wheat exports were forecast at 22.5 million tonnes, up 3 million tonnes from the July projection.

Significantly, the U.S.D.A. also raised its estimate for China’s crop by 2 million tonnes, to a record 126 million tonnes. Because of the larger China crop, the department lowered its forecast for that nation’s wheat imports in the current year to 2 million tonnes compared with the July outlook at 3 million tonnes and 2013-14 wheat imports at 6.77 million tonnes.

World wheat consumption was forecast at a record 706.79 million, up 0.74 million tonnes from 2013-14. World wheat ending stocks in 2014-15 were forecast at 192.96 million tonnes, up 3.42 million tonnes from the July outlook and up 9.3 million tonnes, or 5%, from 183.66 million tonnes in 2013-14.

The U.S.D.A. also raised its forecast for U.S. wheat production. The 2014 U.S. wheat outturn was forecast at 2,030 million bus, up 38 million bus from the July projection but down 100 million bus, or 5%, from 2,130 million bus in 2013. The hike in the production forecast lifted the forecast for the U.S. wheat supply in 2014-15 to 2,779 million bus, which still was down 8% from 3,016 million bus in 2013-14.

The U.S.D.A. raised its forecast for feed and residual use of wheat in 2014-15 by 10 million bus, to 155 million bus. Feed usage in 2013-14 was 223 million bus. The U.S.D.A. raised its forecast for U.S. wheat exports to 925 million bus from 900 million bus as the July projection and compared with 1,176 million bus in 2013-14.

The U.S. carryover of wheat on June 1, 2015, was forecast at 663 million bus, up 3 million bus from the July projection and up 73 million bus, or 12%, from 590 million bus in 2014.

Asked what were the major takeaways from the U.S.D.A.’s August reports, Steve Freed, vice-president, ADM Investor Services, Chicago, said, “First of all, the U.S.D.A. confirmed that world wheat crops are getting bigger, especially in Russia and Ukraine. I also think with the larger China crop, there will be less demand from China. Here in the United States, I think most people think the U.S.D.A. is overstating both feed and export demand. The final 2015 carryover may get larger.”

Paul Meyers, chief agricultural economist, Foresight Commodity Services, said the huge increase in the world wheat production forecast was the single most bearish feature in the report. Mr. Meyers recalled that the U.S.D.A. in May, in its first supply-and-demand outlook for 2014-15, forecast world wheat production at 697 million tonnes, which would have been 17 million tonnes smaller than the record 2013-14 crop. Now, the world crop is forecast to be a record and 2 million tonnes larger than last year’s crop. That 7 million tonnes of the increase in forecast wheat production from the July report was projected to take place in Russia and Ukraine, two major wheat exporters, indicated there will be a larger exportable supply worldwide, and even as the U.S.D.A. raised its U.S. export forecast, it was clear U.S. wheat will face significant competition in world markets.

“There has been a dramatic shift in world wheat supply expectations for 2014-15 that has been reflected in the market’s psychology,” Mr. Meyers observed.

Mr. Meyers said the most important market mover for wheat in the next few months probably will be what happens to corn and soybean futures.

“Wheat fundamentals for 2014-15 are now much better known with the completion of the winter wheat harvests,” he said. “We’re still waiting to see how large the corn and soybean crops will be. Most think both of those crops will be larger than the U.S.D.A.’s current forecasts (a record 14,032 million bus for corn and a record 3,816 million bus for soybeans), which should pull down corn and soybean futures prices, and wheat prices as well.”

Mr. Freed agreed this time of year, weather effects on the fall crops is key to market direction.

“We’re coming to the finish line for corn, and August is important to the soybean crop,” he said. “Getting rain in the southern Plains is important for planting next year’s winter wheat crop. Weather is No. 1, but net farm income may be No. 2. We expect a steep decline in net farm income. What does that mean for farmer selling, and what does that mean for acres planted to wheat for next year? We don’t know yet, but this will bear on next year’s supply.”

Mr. Freed and Mr. Meyers saw little opportunity for the wheat market to rally significantly anytime soon.

Mr. Meyers said the Southern Hemisphere crops were an unknown, but there seemed to be no significant weather threat as yet. The Indian monsoon has not been as productive as usual, but there was time for this to change as well. He noted the U.S.D.A. lowered its forecast for European Union wheat exports in 2014-15 by 3 million tonnes because of quality problems in the French and German crops. If the problems are more severe than currently thought, some additional demand may be shifted to the United States, which may provide a boost to prices, but that was not certain.

Tensions between Ukraine and Russia cannot be discounted as a market mover in the event conflict erupts and disrupts wheat exports from either or both of those countries. Mr. Freed pointed to a recent brief rally in prices that was attributed to ideas Russia may invade Ukraine. But the larger wheat production forecasts for those countries seemed to provide some offset to those concerns.

There were macro factors that may bear on wheat price direction such as slowing economic growth in China, financial woes in Argentina and blowback from European sanctions on Russia, but to date, these took backstage to the market’s supply-and-demand fundamentals, and these argued for continued market weakness, Mr. Freed noted.

“If you believe the numbers, prices should go lower,” Mr. Freed said. “We’re at these price levels because the corn crop is good, the soybean crop is good, and the wheat crop outside the United States is very good.”

Mr. Meyers said, “We’re only a month or so away from the corn harvest, and corn futures prices may drop 30@40c a bu in the next six weeks. This will weigh on wheat.”

Assuming this weakening in corn, Mr. Meyers said Kansas City wheat futures prices, currently trading around $6.20 a bu, may drop to $5.80@5.90 a bu in the next three to four months. Mr. Meyers forecast Chicago wheat futures to drop to $5 to $5.10 a bu and Minneapolis wheat futures to drop to about $5.70 to $5.80 a bu.

Asked how bakers should respond, Mr. Meyers said, “I would increase coverage in the fourth quarter, extending contract balances a month or so. And every 10@15c decline in wheat futures prices, add another month of coverage. If we go 40c or so lower, I’d start buying January-March as well, at least January.”

Mr. Meyers suggested patience for April-June. He said the winter wheat crop was being planted under much better soil moisture conditions than a year ago, and there may be a strong rebound in hard red winter wheat production next summer.

Mr. Freed said current prices were good prices, and bakers should lock them in for the fourth quarter.

“And sometime in early 2015, they should probably extend their coverage if prices are at current levels or lower, just in case we have a weather problem next year,” he said. Mr. Freed said flour coverage was about 80% for the remainder of the third quarter but only about 20% to 30% for October-December.

“We hope logistics will be better this year than last, but as of now, there is no indication that they will be,” Mr. Freed noted. “We just don’t know. We have truck, rail and barge freight near record highs for this time of year, and that adds costs to buying flour that cannot be hedged. I wouldn’t be surprised to see a cash wheat basis more volatile than futures this year, and logistics continuing to add to the cost of flour.”

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