A Deep Dive on Wheat
Wheat markets generally have turned higher the past weeks as concerns about the production total for the Northern Hemisphere continue to mount. At first glance, production and stocks both are forecast to come in at a record for the world. But a deeper dive into the situation sheds a different light.
First Stop: Production for major exporters
FBN examined USDA’s latest WASDE and its production forecasts for key exporters.
Here are some key points:
EU production is down sharply, year over year; harvest is underway.
Australian production is forecast to be up sharply; plantings are nearly complete with harvest expected to start in Queensland as early as October but the bulk of harvest occurs in Nov/Dec.
USDA’s increase in Canada’s production is largely tied to durum (USDA’s forecasts include durum). We currently expect non-durum wheat production to be down marginally.
In total, USDA is forecasting key exporters to have lower production, year over year.
Why does this matter? There is a lot of risk around Australia’s and Argentina’s production totals because harvest for both of those exporters is months away. The spring wheat growing season for the Northern Hemisphere is not yet complete. Thus, there is uncertainty around those forecasts as well, which impact the U.S., Canada, Russia and Kazakhstan, as all of those countries produce spring wheat.
Examining risk around exports
The potential volume of exports for these countries is tied to production totals, but the relationship is not 1:1. For instance, the EU and Russia feed large volumes of wheat relative to other exporting countries. For Russia, exports increase approximately 700,000 tonnes for each additional million tonnes produced. This number is a generalization but based on historical relationships is reasonable. For the EU, the relationship is less in that for each additional million tonnes that is harvested, about 500,000 tonnes are exported. Australia and Argentina are more aggressive in their export programs. In other words, for each additional million tonnes of harvested wheat, Australia exports about 750,000 tonnes while Argentina exports closer to 900,000 tonnes. There is great risk around the final volume of Southern Hemisphere exports as it relates strongly to production.
Bringing it all together
Is global wheat production forecast to hit a record? Yes. Are global stocks forecast to hit a record? Yes. But the key takeaway is that excluding China and India—countries where wheat exports are minor—stocks are not increasing for the world. And that is under the assumption that current production forecasts for exporters will be met. Canada and the U.S. are both positioned to have strong export programs this year, pending on the final harvest outcomes for Russia, Australia and Argentina.
The market has been reacting
While MN September futures have traded in the low-end of expectations, FBN leans toward higher values in the near term. Those values are not expected to hit the $6 level outside a fresh production issue for a major exporter, but we do believe the lows are in for the wheat markets. Higher values in futures recently have been tied to the above summary about the wheat market — with lower production in Russia and uncertainty around Argentina and Australia.
FBN's take on what this means for the farmer
For the coming months, FBN expects futures to remain supported and to potentially rise in value. But producer beware. With winter wheat planting season around the corner in the Northern Hemisphere, new-crop futures could lose value between now and early 2021. That is because the EU is not expected to face the same planting issues it had last year and because Russia is not expected to reduce its planted area. Pricing opportunities for the 2020 crop should remain present in the near term. Producers are encouraged to keep an eye out on wheat bids for the 2021 crop that are attractive.
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