Supply shocks and trade upheaval roil wheat markets, August 24, 2010
by Jay Sjerven

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KANSAS CITY — World wheat supply concerns culminating with Russia’s drought and that nation’s ban on grain exports effective Aug. 15 fed a rally in wheat futures that began in mid-June and saw prices surge above $8 a bu in early August at all three U.S. exchanges for the first time in nearly two years. Prices soared above $3.50 a bu from mid-June levels before falling during the past couple of weeks amid ideas the rally was overdone.

Uncertainties abound, according to analysts interviewed by Milling & Baking News. Bears point to still abundant supplies of U.S. and world wheat and indications strong prices will encourage increased winter wheat plantings this fall across the Northern Hemisphere, said Steve Freed, vice-president, ADM Investor Services, Chicago. In contrast, bulls suggest foreign demand for U.S. wheat may exceed current U.S. Department of Agriculture forecasts and warn any weather problem affecting Southern Hemisphere wheat production or winter wheat planting across the Northern Hemisphere may push prices sharply higher again.

In the spring, there were typical worries over summer weather patterns in the United States, but these diminished after the spring wheat crop was successfully planted and winter wheat enjoyed outstanding growing conditions in most areas, said Mr. Freed. With world crop prospects then viewed as generally favorable, wheat futures prices actually were able to ease in late June.

But markets soon turned higher in response to the U.S.D.A.’s Acreage and June 1 Grain Stocks reports issued on June 30 and deteriorating conditions in Canada, Europe and the former Soviet Union, said Paul Meyers, vice-president, commodity analysis, Connell Purchasing Services, Berkeley Heights, N.J.

The June 30 acreage data confirmed area planted to wheat in the United States for harvest in 2010, at 54.3 million acres, was the smallest since 1971. But that was expected by the trade. Indeed, the acreage estimate was a bit higher than the trade thought would be the case, and June 1 wheat stocks came in larger than anticipated. Overall, the reports were viewed as somewhat bearish for wheat. But corn data caught the market by surprise. The U.S.D.A.’s estimates of corn acreage and June 1 stocks fell well below trade expectations, Mr. Meyers said.

“The combination of the lower stocks number and smaller acreage estimate took 500 million bus out of the corn supply,” he said. Corn futures rallied, pulling wheat prices higher in their wake.

During the summer, the outlook for a large U.S. wheat harvest steadily improved despite a 9% reduction in planted area from the year before. With the winter harvest nearly completed and the spring wheat harvest well under way, the U.S.D.A. on Aug. 12 forecast U.S. wheat production this year at 2,264,928,000 bus, up 2% from its July forecast and up 2% from 2,216,171,000 bus last year despite a planted area that was 4.8 million acres smaller than in 2009. The Department projected the average wheat yield this year at a record 46.9 bus per acre, up 2 bus per acre from the previous record and up 2.5 bus per acre from 2009.

This year’s projected U.S. wheat outturn compared favorably with the recent five-year average wheat production at 2,136 million bus and constituted a remarkable turnabout from early expectations.

But the United States stood out among Northern Hemisphere wheat exporters with regard to good fortune with weather, and attention increasingly was directed first to Canada, where excessive spring rain and even flooding prevented millions of wheat acres from being planted, and then to Europe, and especially the former Soviet Union, Mr. Freed said. The European Union endured yield-eroding excessive dryness in the west and excessive precipitation in the east, and vast portions of Russia and other nations of the former Soviet Union were afflicted with the worst drought in decades if not centuries.

“Each week in July and into August there were new reports of more damage to the European wheat crop, particularly in Russia,” Mr. Meyers said.

The U.S.D.A. on Aug. 12 projected global wheat production in 2010-11 at 645.73 million tonnes, down 15.34 million tonnes from its July forecast and down 34.57 million tonnes, or 5%, from 680.30 million tonnes in 2009-10. The U.S.D.A.’s initial forecast for world wheat production in 2010-11 was issued in May at 672.18 million tonnes.

In May, the U.S.D.A. forecast the Canadian crop at 24.5 million tonnes. Because of excessive spring rain and prevented plantings, the U.S.D.A.’s August forecast for the Canadian crop was 20.5 million tonnes, 4 million tonnes lower. The U.S.D.A.’s initial forecast for E.U. wheat production was 145.07 million tonnes. By August that forecast was trimmed to 137.51 million tonnes.

The widest decrease in production was estimated for Russia. The U.S.D.A.’s May forecast for Russian wheat production was 58 million tonnes, but by August, the forecast dropped 13 million tonnes, to 45 million tonnes. In 2009, the Russian crop was 61.7 million tonnes.

The production shortfalls in these key exporting regions more than offset larger than initially forecast crops in the United States, China and India. The U.S.D.A. forecast world wheat ending stocks in 2010-11 at 174.76 million tonnes, down 12.29 million tonnes from the July forecast and down 10% from 193.97 million tonnes in 2009-10. The U.S.D.A.’s initial forecast for the 2010-11 world wheat ending stocks was 198.09 million tonnes.

World wheat supplies were smaller than expected last spring, but they were not small, Mr. Meyers said. At 174.76 million tonnes, 2010-11 world wheat ending stocks were projected to be the third largest in nine years after 193.97 million tonnes in 2009-10 and 204.28 million tonnes in 2001-02, and would be 40% larger than 124.87 million tonnes in 2007-08, when world wheat prices surged to record levels.

Nevertheless, the withdrawal from world wheat markets of Russia, the world’s third-largest wheat exporter, had an electric effect. With the announcement by Russian Prime Minister Vladimir Putin that Russia would ban grain exports from Aug. 15 at least through the end of 2010, the U.S.D.A. reduced its forecast for Russian wheat exports in 2010-11 by 12 million tonnes, to 3 million tonnes. In 2009-10, Russia exported 18.5 million tonnes of wheat. The new export forecast translated into a world wheat export share for Russia this year at 2.4% compared with 14% in 2009-10 and 12.8% in 2008-09.

Russian exporters were forced to seek to delay shipments until after the ban or had to cancel contracts outright, and principal buyers of Russian wheat, such as Egypt, the world’s largest wheat importer, scrambled to secure supply from other origins. The United States was expected to draw the most new export business as a result of the ban, but Australia and the E.U. also were expected to export increased volumes to buyers of Russian wheat as well.

The U.S.D.A. on Aug. 12 increased its forecast for U.S. wheat exports in 2010-11 to 1,200 million bus from 1,000 million as its July forecast. It would be the largest U.S. wheat outgo since 1,263 million bus in 2007-08, when crop shortfalls in several other exporting countries forced world buyers to seek U.S. wheat despite record prices. With the exception of 2007-08, U.S. wheat exports this year were forecast to be the largest since 1995-96.

Even with the larger export forecast, U.S. wheat supplies in 2010-11 were viewed as ample with the carryover of wheat on June 1, 2011, forecast at 952 million bus, down 21 million bus from 973 million bus in 2010, but with the exception of that year, the largest year-ending U.S. wheat inventory since 1988.

Mr. Freed noted, “From the moment Russia announced the export ban on Aug. 5, all the known bullish news was trading in the market, and prices retreated.” In the case of the Chicago December wheat future, prices dropped from an Aug. 6 high of $8.68 a bu to a low on Aug. 17 of $6.82 a bu, an astounding $1.86 a bu plunge. In the same timeframe, December futures dropped $1.45 a bu in Kansas City and $1.47 a bu in Minneapolis.

But the Russian story was far from over.

“Indications were the Russian grain crop may end up being smaller than when they announced the ban,” Mr. Meyers said. “Some suggest Russia may not export any more wheat this crop year.” Mr. Meyers also noted Russia is a low-price seller of wheat, and the country’s absence from the market may raise the floor for world wheat prices.

The drought also was threatening winter wheat planting in Russia, which typically begins in mid-August, Mr. Freed said, noting recent reports out of Russia suggested up to a quarter of the cropland may not be planted because of the excessively dry conditions.

Mr. Meyers pointed out Russian winter wheat may be planted up to mid-October, and land the Russians aren’t able to plant to winter wheat this fall may be planted to spring wheat next year. But Russian spring wheat yields typically fall short of winter wheat yields, he added.

“If we go another three or four weeks without significant rain in Russia and Ukraine, the market may add another 50c a bu to wheat prices from where we are today,” Mr. Meyers cautioned. “I don’t know that we’d make new highs, but the market certainly would be concerned.”

Large crops were forecast for Australia and Argentina, and these projections were trading in the market. Australia, where two consecutive years of drought helped ignite the 2007-08 run-up in world wheat and food prices, was projected to harvest 23 million tonnes of wheat this season, not a record crop, but a large one, and Argentina was projected to harvest 12 million tonnes, up 2.4 million tonnes from 2009-10.

Mr. Freed and Mr. Meyers agreed U.S. wheat producers were likely to increase plantings of winter wheat this fall because of high prices.

“I assume we will get 3 million to 3.5 million more acres planted for harvest in 2011,” Mr. Meyers said. “I’ve heard some estimates suggesting an additional 6 million wheat acres.” If 3 million additional acres were to be planted to winter wheat this autumn, at least half the increase would be in soft red winter wheat. Only 6 million acres were planted to soft red winter wheat for harvest this year partly because of failed plantings because of excessive rain in the autumn of 2009.

Winter wheat area planted for harvest in 2010 was 37.7 million acres, the smallest winter wheat area since 1970.

Mr. Freed said indications were producers across the Delta states and in the South planned to plant soft red winter wheat heavily with seed already in low supply in many areas.

Mr. Meyers expressed the concern high wheat prices might be sending producers distorted or even wrong signals with regard to what they should be planting this autumn and next spring.

“Wheat acreage will expand in the E.U. and the U.S. and other parts of the world,” he said. “The world may not need more wheat, but it does need more oilseeds and corn.”

Mr. Meyers said both corn and soybean futures prices should weaken under harvest pressure and exert a tug on wheat in the fall. He said Kansas City wheat futures during the fourth quarter of 2010 may range from $6.30 to $6.70 a bu and weaken another 30c into the first quarter of 2011.

“Among my assumptions are the dollar stabilizes or even firms and crude oil holds between $70 and $80 a barrel,” he said. “If we get a weaker dollar, wheat prices may hold above my forecast.”

The U.S.D.A. forecast corn and soybean production to set new records. At the same time, the August forecasts were based on Aug. 1 conditions, and weather since has been hot and dry in many key areas, which may reduce yields of the fall crops from Aug. 1 expectations, Mr. Freed said. Additionally, South American corn and soybean crops were forecast to be smaller this year than last while Chinese demand for soybeans seems insatiable. While harvest pressure on prices may be likely, Mr. Freed said corn and soybean prices may end up providing a floor to wheat prices.

Mr. Freed said technical traders seemed to argue for $6.70 a bu wheat, while bulls wary of heavier-than-forecast foreign demand for U.S. wheat have suggested wheat prices may make a run at $9 a bu.

Both Mr. Freed and Mr. Meyers expect wheat, corn and soybean prices to strengthen early next year and into the spring as the grains compete for producers’ attention and planted acres.

Mr. Freed said the stock market, the dollar and other markets bear watching. There remained the possibility grain markets may see more money channeled their way by investors seeking to hit a “homerun.” 

Prices remain strong despite record large corn, soybean crops

KANSAS CITY — Despite the prospect of record-large U.S. corn and soybean crops this year, prices of both have held up remarkably well, mainly on a strong export outlook and spillover support from surprisingly strong wheat prices.

While analysts had mixed ideas about corn and soybean production levels and price direction for the rest of 2010, they agreed supplies would be adequate to ample for both.

The U.S. Department of Agriculture on Aug. 12 projected U.S. corn production this year at 13,365 million bus, up 2% from 13,110 million bus in 2009, which was the previous record. Based on Aug. 1 conditions, the average corn yield was forecast at a record 165 bus an acre. Soybean production was forecast at 3,433 million bus, up 2% from 3,359 million bus last year, which also was the previous record. Soybean yield was forecast at 44 bus an acre, equal to the 2009 record.

“There’s no shortage of soybeans,” said Dan Basse, market research director at Ag Resource Consulting Group in Chicago. In fact, Mr. Basse expected the soybean crop may be larger than the U.S.D.A.’s August forecast. But strong export demand, mainly from China, may keep soybean prices around $10.50 a bu into the fall, Mr. Basse suggested.

“The question is, will it continue,” he said of the Chinese buying.

The U.S.D.A. on Aug. 12 projected U.S. 2010-11 soybean exports at 1,435 million bus, up 65 million bus, or 5%, from its July forecast but down 35 million bus, or 2%, from 1,470 million bus in 2009-10.

Paul Meyers, vice-president, commodity analysis, Connell and Company, Berkeley Heights, N.J., was less confident about the size of the soybean crop because of dryness in several southern states and parts of the eastern Corn Belt.

The carryover of U.S. soybeans on Sept. 1, 2011, was projected by the U.S.D.A. at 360 million bus, unchanged from its July forecast but up 200 million bus, or 125%, from 160 million bus estimated for Sept. 1, 2010. Global 2010-11 soybean ending stocks were projected by the U.S.D.A. at 64.73 million tonnes, down 3% from 67.76 million tonnes projected in July but up 2% from 63.52 million tonnes this year.

Global supplies from large stocks in South America after record production in 2009-10, prospects of near record production next year in that region and record U.S. 2010 production will pressure prices, Mr. Meyers suggested. He said he expects November soybean futures to drop to the $9.25@9.50 a bu range, down about 10% from current levels.

The analysts also had differing views of yield trends for both crops. Mr. Basse said he thinks the U.S.D.A. forecast corn yield was too high and might decline as the crop progresses, even though development has been ahead of normal in many areas. While forecasting a fall corn price will be like aiming at “a moving target” for several more weeks, Mr. Basse said he wouldn’t rule out $5 corn in mid-September. He also suggested that if the corn crop comes in below expectations, rising corn prices may pull soybean prices to $11 a bu.

Mr. Meyers, on the other hand, expects corn yields may move above the U.S.D.A. forecast to an even higher record since the main concern about hot weather has passed. A large crop and plentiful supplies may push December corn futures prices down to the $3.70@3.80 a bu range, he suggested. September and December corn futures last week were trading around $4.15@4.30 a bu.

Recent high corn prices may have hurt demand, Mr. Meyers said. He forecast the Sept. 1, 2010, U.S. corn carryover at 1,500 million bus, and the 2011 carryover at 1,460 million bus, compared with the latest U.S.D.A. projections of 1,426 million bus and 1,312 million bus, respectively.

Mr. Meyers suggested the trade will have to wait until the Oct. 8 U.S.D.A. Crop Production report for a good indication of 2010 U.S. corn and soybean production because the harvests will not be far enough advanced when the next report comes out on Sept. 10.

Current strong prices may have a significant effect on 2011 planting intentions, Mr. Meyers said.

“Prices will encourage planting of wheat,” Mr. Meyers said, “but we don’t need more wheat.” Instead, there needs to be about 3 million more acres of corn in 2011, which mostly likely will have to come from area currently planted to soybeans, he suggested. Soybean plantings in 2011 may fall 5 million acres, Mr. Meyers said, with some area also lost to wheat.

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