- By any fundamental measure, the world wheat balance sheet has tightened considerably since 2006. World stocks remain a near record large 266 million mt. But 139 million (52%!) are stuck in China. China will not be an exporter of wheat, and so available exportable supplies are down sharply from recent years. This has been included in USDA WASDE reports since May, but we look for yet further contraction in the months ahead. The two primary areas of concern are the Black Sea and Australia. Apr-Jun precipitation in S. Russia (the country’s winter wheat belt) and NSW in Eastern Australia are both historically low. The USDA has not really begun to adjust yield in Russia (only acres were lowered on Tuesday), and further production declines lie ahead. Note also that ABARES in Australia lowered its Aussie production forecast to 22 million mt, vs. the USDA’s 24. It is rather easy to strip another 4-5 million mt from major wheat exporter production.
- The USDA in its June report left major exporter stocks/use unchanged at 14%. This compares to 17% in 2017/18, which is a significant change. Whether domestic use in Russia declines by 5 million mt, which the USDA forecast, remains to be seen, and some contacts argue that this will be difficult. Regardless, assuming further downgrades to Russian, Australian, and very likely Ukrainian production, we expect major wheat exporter stocks/use to test the recent low set in 2007. $10 plus wheat (like in 2017) is of course not expected, but world cash markets will likely rally into the latter part of summer. There is just no incentive for exporters to chase breaks. Since 2016, major exporter wheat production will have fallen 23-25 million mt. No longer does price need to find demand. This is an important change that has developed.
- There is a pretty strong correlation between major exporter stocks/use and average cash prices in Russia. Recall Russian prices are the benchmark for the rest of the world. Assuming major exporter stocks/use forecast of 13%, Russian prices in 2018/19 will likely average $225/mt, vs. $198 so far in 2017/18. There is potential for seasonal highs to be set at $230-235/mt. At this point Gulf HRW competes for world market share at/below $5.40. Gulf wheat is expensive currently, but we fully expect world cash prices to rally in the weeks ahead. Fob lineups will probably look very different 4-5 weeks from now. It is the goal of the market to encourage N Hemisphere producers to expand acres. If sizable expansion (2-3%) is not found, major exporter stocks contract further in 2019 assuming trend yields. Breaks in wheat are opportunities for end users to extend coverage.