- The US soil moisture loss continues; the US forecast is cooler into mid-August than prior runs, but a lack of meaningful rainfall will allow net declines in soil moisture to be ongoing. The better performing EU model keep rainfall into Aug 10 confined to IA, MN and WI. No longer is excessive heat forecast, but temperatures next week will range in the 80s and 90s across much of the Plains and Midwest. The mean position of high pressure ridging moves eastward on the weekend. The flow of moisture will be forced into the far N Plains and Great Lakes next week. Summer-like temperatures will be sustained into the middle part of August. This ridge returns to the Inter-mountain West in the 11-15 day period, but the lack of upper level humidity will prevent a wetter pattern from being established through Aug 15-16.
- Australian moisture deficits widen further; the Australian forecast features some rain chances across the western wheat areas (WA), but ongoing complete dryness in the East. Aussie dryness so far has been something to watch closely. Now crop-critical weather lies in the offing. Aussie wheat, canola and barley yields are determined by weather from August to October. El Niño is on track to be established by September. This very likely sustains dryness in E Australia through the autumn months. NSW, which is currently very dry, accounts for a third of wheat total Aussie wheat production. Rainfall there since Jan 1 rests at 6.3”, just 40% of normal. Some 10” or rain is needed in the next 60 days to erase moisture deficits entirely. Contacts suggests wheat production of even 20 million mt (vs. USDA’s 22) is optimistic.
- News of worse than expected European wheat yields continues almost daily. Russian wheat yields suggest the USDA’s 67 million mt production estimate is close to accurate, but there is potential for modest downgrades depending on spring wheat yield data. All told, we estimate the EU’s total wheat crop at 135 million mt. Russian production is pegged at 66 million mt. Combined EU-Russian wheat production for 2018/19 is estimated at 201 million mt. This is down 11 million mt from the USDA’s estimate in July and down a hefty 36 million from last year. This is also the lowest since 2013. Meanwhile, world trade has been fairly robust since 2016. Global trade data through June suggests the USDA’s old crop world wheat trade figure is accurate. And there is no reason to believe trade will contract in 2018. Certainly there has been no sign of demand rationing at current prices.
- We also suggests the USDA is too low with its Russian end stocks forecast at just 4.8 million mt. This reflects just 24 days of use at the end of the crop year on May 31. We highly doubt end users will allow stocks to get so tight across 11 time zones. USDA pegs EU wheat end stocks at just 10 million mt, which reflects only 25 days of use. Rationing will have to come from reduced exports. We estimate combined EU-Russian wheat exports in 2018/19 at 46.5 million mt, down 18 million from last year and down a sizable 15 million from the USDA’s July forecast. This demand will be forced to the US/Argentina. Some demand may be eliminated altogether via political action. Note that EU-Russian exports in 2016/17 were just 55 million mt, and US exports reached a multi-year high 1,051 million bu. US wheat exports will likely reach above 1.2 billion this year.
- Most importantly, world wheat cash prices do not yet reflect the dramatic contraction in major exporter stocks. The average price of wheat in Russia and France today rests at $240/mt, basis spot. This compares to an average of $192/mt in Sep-Nov last year. We fully expect EU and Black Sea fob prices to average $275-295/mt this year. As such, the US Gulf market will boost its share of world trade even at $6.25-7.00 basis Dec KC. Ultimately, the US wheat market should score its 2018 high at $6.75-7.25 basis Dec KC. Even higher prices lie ahead if Australia’s crop fails to exceed 20 million mt. Breaks in wheat will be very short lived into early 2019 as short bought end users extend their coverage.
- US and world wheat prices have pushed to sharply higher levels with September KC wheat nearing the psychological $6.00 mark amid rumors that the Ukraine is considering placing an export tax or ban on its wheat exports. The sharp fall in Russian/EU wheat production is causing panic on future wheat availability for world importers. Some cite 2017/18 EU wheat exports below 10 million mt on a total crop of 135 million mt vs the July WASE forecast of 27.5 million. The dire drought of the EU is causing panic buying of exportable wheat and barley, and importable tonnages of feed grains. US corn can work into Spain, but the rest of the EU cannot take US corn on GMO issues. The point is that world stock/use ratios of wheat/corn are at record lows, and there is no end to the dire EU drought. The bull story in world wheat is just unfolding. The outlook for US corn could become equally as bullish with a yield at 175 bushels/acre or below next Friday. Soybeans remain a political marketplace.
- Chicago brokers report that funds have bought 6,000 contracts of wheat and 5,400 contracts of corn, while selling 4,500 contracts of soybeans. In soy products, funds have sold 4,300 contracts of soyoil and 2,100 contracts of meal.
- The US corn export sales pace justifies the USDA July forecast of 2,400 million bu. We believe that latest harvest yield projects a 2018 EU wheat crop of 135 million mt or less. This all wheat EU crop estimate includes 6.7 million mt of durum. The EU corn crop is also in decline with private forecasts now looking for a harvest of 56.5 million mt, down 5 million from July. This would raise EU corn imports to 19-21 million mt or nearly all of the Ukraine’s available corn exports. Amid a decline of 9-11 million mt in Latin American corn exports, the rest of the world feedgrain demand will most likely be shifting to the US. A 2018/19 US corn export estimate of 2,500-2,600 million bu has become realistic. US gulf corn exports will be record large beyond September. A $6.00 price on spot Chicago wheat will not even start the demand rationing process. Wheat is a food grain and it is all but impossible to understand what price is needed to ration consumer demand. Our point is that it is highly unlikely that US/world wheat is close to their final rationing price high.
- The midday central US GFS weather forecast is much drier across the heart of the Midwest compared to the overnight run. Any widely scattered rains will occur for the E Midwest with reduced amounts heading west. However, the rains from MO into PA have been reduced by over 1.00” in the 10 day period. This is more like the EU model calling for an arid rainfall profile with near to above normal temperatures. The forecast looks for temperatures to average in the 80’s to lower 90’s next week. Coolness will prevail for the next few days. There is no sign of any intense Midwest heat. The best rain chances are with a frontal pass early next week. Thereafter, rains will be light and widely scattered. Midwest soil moisture levels are in fast retreat.
- The wheat market has fallen off its early rally highs on profit taking. However, the wheat bull story is far from being digested and any break to $5.60-5.70 Sept KC looks very much like a buying opportunity right now. GASC booked 240,000 mt of Romanian wheat at $235-238/mt or some $16/mt higher than its last tender. Including freight, Egypt is now paying the equivalent of $6.80/bu for its wheat imports. World corn has a bull story developing that similar to wheat as world production declines, and demand is solely focused on the US.
- Watch this space carefully!