On Thursday, the May WASDE report offered a few bearish macroeconomic numbers that weighed on the broader U.S. market.
Following that report, prices slumped on concerns about a larger international crop, strong Russian exports, and a number of other factors. Before we dive into the news of this week, let’s take a look at the futures contracts that we regularly monitor and fund positioning on each board:
Chicago Soft Red Winter wheat:
- July ‘18: -5.3% or 27.8¢ to 4.985 USD / bushel
- Sep ‘18: -4.8% or 26¢ to 5.158 USD / bushel
- Dec ‘18: -4.6% or 25.7¢ to 5.373 USD / bushel
- Mar ‘19: -4.1% or 24¢ to 5.553 USD / bushel
Kansas City Hard Red Winter wheat:
- July ‘18: -6.8% or 37.8¢ to 5.18 USD / bushel
- Sep ‘18: -6.5% or 37.3¢ to 5.365 USD / bushel
- Dec ‘18: -6% or 35.8¢ to 5.62 USD / bushel
- Mar ‘19: -5.4% or 33.2¢ to 5.798 USD / bushel
WASDE Wheat Recap
Thursday’s WASDE report offered a few key changes for 2017/18 and 2018/19 that will impact farmers crop strategies moving forward. Most important was the increase in global wheat stocks for 2017/18. The USDA hiked global 2017/18 carryout by 2.3 MMT to 271.2 MMT. That is a new record.
The figure also beat average analyst expectations by a whopping 3 MMT. Yes… markets had actually expected a decline in global inventories from the April report.
The good news is that the USDA is expecting a tighter balance sheet in 2018/19 as global wheat carryout for the coming crop year was forecast at 264.3 million tonnes. This was nearly 5 million tonnes below the five-year average.
Part of the decline in global ending stocks is attributed to lower 2018/19 wheat production in the US and Russia, something we covered on Thursday immediately following the report.
US wheat ending stocks for 2018/19 are projected down 115 million bushels year-over-year to 955 million, which, if realized, would be a 4-year-low. Worth noting is that the USDA is more optimistic than last week’s Wheat Quality Council Tour in Kansas. We got an estimate of 243.3 million bushels of wheat coming off for the Kansas 2018/19 wheat crop whereas the USDA is predicting 270 million bushels.
Ironically, both the tour and the USDA are using a 37 bushel-per-acre average yield. Translation? It’ll all come down to the number of acres that get harvested. Across all of the US, total winter wheat harvested acres estimated by the USDA for the 2018/19 crop of 24.8 million acres would be a record low….
However, 2017/18 Russian exports continue to impress as the USDA said that the country will end up shipping 38.5 MMT during the 2017/18 crop year. Not only is that a record, but it’s a harbinger of what we can expect in the future. Look for Russia to continue soaking the market with low-quality wheat while cutting into the market share of nations like the United States and Australia.
The agency did hike U.S. wheat exports from 24.8 MMT in 2017/18 to 25.2 MMT for the 2018/19 new crop year.
But after last week’s exports report, can we really trust either of those numbers?
Did You Miss Last Week’s Exports?
This slid under the radar this week… but U.S. wheat sales were abysmal on Thursday. Weekly net sales of wheat came in at 35,200 MT for old crop. That figure was off 85% from the previous week.
Export inspections were up on the week. At 321,900 MT, the figure came in 14% higher than the previous period. The top five export destinations were Japan (89,500 MT), the Philippines (61,900 MT), Taiwan (40,300 MT), Mexico (38,400 MT), and Honduras (21,300 MT).
Wheat Crop Quality Improves… Slightly…
Perhaps the market was more focused on the quality of the winter wheat crop. The USDA said that 33% of the U.S. crop is now headed. The report also said that conditions improved by 1 percentage point to hit 34% “good-to-excellent.” The chart below provides a glimpse of crop conditions across our top producing states.
NAFTA and Global Trade Shakeup
This week, U.S. Speaker of the House Paul Ryan said that any renegotiation of NAFTA must be finalized by May 17. Otherwise, Ryan notes that the current Congress will not be able to hold a vote on the matter by the end of the year. Congress will be in a Lame Duck session – meaning that there will be many retiring or defeated (in this November’s election) Members of Congress voting on the bill. For many, it would not be a priority to pass a major trade deal.
This creates a wealth of uncertainty around the deal moving forward. Mexico is set to hold its Presidential election later this summer. It appears that a populist with anti-NAFTA sentiment is poised to capture the presidency.
As predicted, changes in U.S. trade policy have unleashed other nations to pursue markets dominated by American exports. The very suggestion of changes to NAFTA pressed Mexico to seek corn supply from South America.
China turned to Brazil, Canada, and Argentina for soybeans over the current trade spat.
And Australia is already saying that the TPP deal will give them distinct advantages over American wheat farmers.
This week, Australian trade officials touted the benefits of the TPP to the nation’s economy. Australia will aim to bolster its wheat exports to nations like Japan, which is currently the largest export market for U.S. wheat.
Turning Our Eyes to Canada
Also this week we got Statistics Canada’s estimates for grain stocks through March 31st, 2018. Specific to wheat (all wheat excluding durum), there is still nearly 13 million tonnes available as of the end of the first calendar quarter. This is basically unchanged year-over-year but 7.6% below the five-year average.
Wheat (excluding durum) held on farm still is sitting at nearly 9.8 million tonnes. This is 3.3% more than last year’s 9.45 million tonnes held by farmers, but also 8% lower than the five-year average. Comparatively, wheat held in commercial storage as of March 31st came in at 3.2 million tonnes, down 9% year-over-year.
What is the quality of the Canadian crop right now?
It appears that wheat producers have overcome the cold and snow. Reports indicate that the recovery after the recent months has been much better than expected, which naturally has weighed on prices.
Up in Alberta, it’s still very early to try to make a complete assessment of the crop. However, reports from Western Winter Wheat Initiative indicate that a lot of the crop is sitting between fair and excellent conditions. Elsewhere across the country, we have seen some great uncertainty and concerns about the wheat quality…
But we have to stress patience right now. If you are a winter wheat farmer who is concerned about the size and quality of your crop… take a step back. Don’t start ripping up crop just because your neighbor is doing that. Many agronomists are advocating for a quick application of nitrogen to help bolster the crop.
A lot of people are abandoning right now. And that means that you have to make a decision based on your cash flow needs. If you can handle the pressure and afford some uncertainty right now, and it’s clear that there’s a chance of a crop, perhaps hold onto your winter wheat crop?
We’re going to see some price movement up after this recent overreaction in the winter wheat / low protein wheat market.
For now, we remain 80% sold on 2017/18 old crop winter wheat and 30% sold on 2018/19 new crop.
Have a great week!
– Brennan, Garrett, and Adrian
May 10 – May WASDE Report Shows 1.8 Billion Bushels of US Wheat in 2018
May 6 – Winter Wheat Weekly GrainCents Digest
May 4 – Africa Becomes a Booming Market for Canadian Wheat
May 3 – Here’s What Day 2 of the Winter Wheat Tour Revealed
May 2 – What Is Happening in the Winter Wheat Fields?
April 29 – Winter Wheat Weekly GrainCents Digest
April 27 – StatsCan Expects 25.26 Million Acres of All Wheat in Canada in 2018/19