The differences in opinion may be traced in part to interpretation of the wheat balance sheet for 2013-14 as revised by the U.S. Department of Agriculture on Nov. 8 in its November World Agricultural Supply and Demand Estimates report.
Most trade analysts expected the U.S.D.A. to lower, not raise, its forecast for the 2014 wheat carryover in the November report. The U.S.D.A. forecast the June 1, 2014, inventory of wheat, comprising the 2014 carryover, at 565 million bus, up 4 million bus from the September projection but down 153 million bus, or 21%, from 718 million bus in 2013.
Before the November WASDE report was issued, the average of trade estimates for the 2014 wheat carryover was around 520 million bus. While many remained skeptical about the U.S.D.A. numbers, the report demanded serious consideration, and it lent support to the downtrend seen in wheat futures prices from recent highs set in mid-October. In the case of Minneapolis wheat futures, contracts set new season’s lows in the wake of the report while Kansas City and Chicago wheat futures traded close to but not below their season’s lows mostly set in September.
While the U.S.D.A. raised its forecast for wheat supplies in 2013-14, which factored into its revised carryover forecast, the real surprise was in a smaller projected wheat disappearance.
The U.S.D.A. forecast wheat supplies in 2013-14 at 2,998 million bus, up 26 million bus from the September projection but down 4% from 3,131 million bus in 2012-13. The U.S.D.A raised its 2013 wheat production estimate by 16 million bus, to 2,130 million bus, and it raised its forecast for wheat imports in 2013-14 by 10 million bus, to a record 150 million bus.
The U.S.D.A. forecast wheat disappearance in 2013-14 at 2,433 million bus, up 22 million bus from its September projection, despite an 8-million-bu reduction in the forecast food use of wheat to 950 million bus. Wheat disappearance in 2012-13 was 2,414 million bus.
Traders expected a smaller carryover projection mostly because the Sept. 1 Grain Stocks report issued at the end of September indicated a higher feed and residual use of wheat in June-August than the market had anticipated. On the basis of that report, the trade expected the U.S.D.A. in its November WASDE to raise its forecast for feed and residual use by 50 million, 60 million or even 70 million bus from the September outlook, which was for 280 million bus, observed Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., Stephenson, Va. Instead, the U.S.D.A. raised its feed and residual forecast by only 30 million bus, to 310 million bus. In comparison, feed and residual use of wheat in 2012-13 was 388 million bus.
Many also thought the U.S.D.A. would raise its export forecast from the 1,100 million bus projected in September because wheat export sales from September to November were stronger than generally expected. Many had thought the U.S.D.A. would raise its export forecast by 25 million or even 50 million bus, Mr. Meyers noted, but the department left its export forecast unchanged. U.S. wheat exports in 2012-13 were 1,007 million bus.
Mr. Meyers indicated he thought the final U.S. export number will be a little higher than the U.S.D.A. projection. At the same time, he noted, the Southern Hemisphere wheat harvest was under way, and both Argentina and Australia were expected to have larger crops than a year ago.
The U.S.D.A. forecast the Argentine crop at 11 million tonnes compared with 9.5 million tonnes in 2012-13, when drought exacted a vicious toll, and 15.5 million tonnes in 2011-12. The U.S.D.A. forecast Australian wheat production at 25.5 million tonnes, up from 22.08 million tonnes in 2012-13.
“Argentina has been out of the export market for several months (because of the drought-reduced 2012-13 outturn), and they are not going to be a major exporter in 2013-14, but they should be able to export 3 million to 4 million tonnes,” Mr. Meyers said. “Australia is expected to export 19 million tonnes.”
Increased exportable supply, particularly in Australia, may slow demand for U.S. wheat, Mr. Meyers said, and he pointed to a recent Iraqi wheat tender where Australian hard wheat offers were about $20 a tonne below those from the United States.
“Overall, the U.S.D.A.’s wheat number (carryover) surprised a lot of people, including me,” Mr. Meyers said. “My estimate of the U.S. wheat carryover is 527 million bus, and that’s based on a little higher feed use and a little higher export volume than forecast by the U.S.D.A.” Mr. Meyers said when all is said and done, the 2014 wheat carryover may be closer to 500 million bus to 525 million bus than the 565 million bus forecast by the U.S.D.A.
Steve Freed, vice-president, ADM Investor Services, Chicago, said the fact the U.S.D.A. made no significant change to its wheat carryover forecast left the trade balancing what remained a tight old crop situation, particularly in the case of hard red winter wheat, and expectations for larger supplies in 2014.
“We’re walking a ledge,” Mr. Freed said. “The old crop wheat situation remains tight, especially for hard red winter wheat. In that regard, is Brazil’s wheat buying completed, or do they have more wheat to buy.”
At the same time, looking ahead to 2014, Mr. Freed said there should be larger soybean, wheat and perhaps corn supplies.
“Everything pricewise should go lower in 2014,” he said.
Mr. Freed asserted many analysts didn’t have export forecasts significantly different from the U.S.D.A.’s outlook. He pointed out Canada harvested a record crop, the European Union harvested a large crop as did the former Soviet Union, although there were quality problems in the latter region. Additionally, India has begun to export wheat.
At the same time, recent declines in prices have made at least U.S. soft red winter wheat more competitive in world markets. Mr. Freed noted the U.S.D.A.’s 24-hour reporting service on Nov. 20 indicated Egypt had purchased 110,000 tonnes of wheat.
Both Mr. Meyers and Mr. Freed agreed the winter wheat crop was off to the best start since 2008. Mr. Meyers said winter wheat plantings may be down 700,000 acres in 2014 from 2013 with the decrease attributed to lower soft red winter wheat plantings. He suggested hard red winter wheat planted acreage may be up 1% from 2013 with soft red winter wheat down around 2%. Mr. Freed agreed hard winter wheat plantings likely were about the same as last year while soft red winter wheat area may be trimmed.
Mr. Meyers and Mr. Freed also agreed northern Plains producers may plant more spring wheat next spring. Mr. Meyers noted northern Plains farmers were prevented from planting spring wheat on around 600,000 acres last year because of wet weather, and he expected this area to be planted to wheat in 2014. Mr. Meyers also indicated he expected all-wheat plantings to increase in 2014. He forecast all-wheat area planted for harvest next year at 56.5 million acres compared with 56.2 million acres this year.
Mr. Meyers said more important, though, was harvested acres.
“Because of the drought we had in the Plains last year, there were a lot of acres planted to hard red winter wheat that were abandoned,” he said. “So, my harvested acreage forecast for the United States in 2014 is 49.3 million acres, up around 4 million acres from 2013.”
Despite the outlook for larger supplies next year, there was a way to go before they fully enter the calculus, Mr. Meyers suggested. He said current wheat futures prices were at the low end of the range he expects to see in the next few months. Mr. Meyers forecast Kansas City nearby wheat futures to average between $7.20 and $7.60 a bu in the next few months, Chicago nearby wheat futures to average between $6.65 and $7.05 a bu, and the Minneapolis March nearby contracts to average between $7.25 to $7.65 a bu. Trading ranges may be expected to be wider, he said.
“Even though the U.S.D.A. carryover for wheat is a little higher than mine, we have had U.S. wheat stocks declining four years in a row,” Mr. Meyers explained. “My carryover stocks-to-use ratio for wheat for 2013-14 is the second lowest in the last 17 years.”
Mr. Meyers added the market may want a larger weather premium, and he pointed to difficulties experienced in both Russia and Ukraine in planting their winter wheat crops because of wet weather.
“Both of those countries planted less winter wheat than they did a year ago,” he said. “The conditions have improved over the last month, but we go into the spring knowing they have less acreage there.”
Mr. Meyers also noted world wheat consumption was forecast to be record high, and despite the forecast for a record world wheat crop in 2013-14, “we’re adding only 3 million or 4 million tonnes to the world wheat carryover.
“So, we may have firming prices into the spring based on uncertainty and overall world demand for wheat that has held up well,” Mr. Meyers said. “U.S. farmers haven’t been selling much wheat. They think prices will go up and seem to be in no hurry to sell.” He also pointed to unusually strong cash wheat basis levels that were another indicator of strong demand.
Mr. Freed said with regard to futures price direction, “The path of least resistance is lower. Looking ahead, assuming normal weather, we are likely to have more wheat in the United States and around the world. That will weigh on prices. For prices to go significantly higher, we would have to have a South American weather problem.” With the wheat harvest under way, such a problem would have to afflict soybeans or corn.
Mr. Freed said bakers’ flour coverage for January-March was historically small for the date. Bakers were buying hand-to-mouth largely in the hope the cash wheat basis will break. At the same time, Mr. Freed advised that bakers should add 10% to 15% to their first-quarter 2014 flour coverage if futures prices again break below support levels.