Wheat Wins WASDE

Commodity traders were active buyers of corn, soybeans and wheat Wednesday and Thursday, placing their bets ahead of the December World Agricultural Supply and Demand Estimates (WASDE) supply and demand report. While they were also buying gold, crude oil and some other items, they were clearly focused on the "event risk" of the USDA report and anticipating a bullish outcome for the three crops.

Wheat turns out to have been the best bullish bet on USDA report day. It had been expected to be the quiet one, with little change in U.S. ending stocks and a possible increase in the already record-large global ending stocks figure.

What happened?

The U.S. wheat markets had been selling off over the last couple weeks, trying to become more competitive versus cheaper FOB offers from France, Russia, among others; USDA projected record large world wheat ending stocks in the November WASDE report, and USDA was also expected to increase production forecasts for Australia, Canada and possibly Russia in December.

The 3.95 million-metric-ton (mmt) cut in projected world wheat ending stocks was the biggest surprise in the report, both in the size of the cut and because traders had been leaning toward an increase. It wasn't a revision issue, as beginning stocks were lowered only 140,000 metric tons (mt). Production was increased in the expected places but not always by the expected amounts. Australia was hiked 1.5 mmt to 30 mmt despite ABARES raising their estimate to 31.17 mmt. Briefing notes show some concern about wet weather interfering with harvest in some states. Russian production was increased another 500,000 mt to 84 mmt.

Despite a strong export program, Russian ending stocks are expected to be at a multiyear high of 10.73 mmt. Food prices are soaring in Russia, raising questions about future export limits. Canadian production was hiked 180,000 mt based on Stats Canada data. The big shift in the report was a 3.9 mmt hike in projected wheat feeding globally versus last month. Of that, 3 mmt was expected to happen in China, where corn futures prices are approaching $10 per bushel and wheat works into feed rations.

World wheat ending stocks are still expected to be record large on May 31, at 316.5 mmt. They would be second highest on record as a percent of use, trailing only 1986 at 31.8% (marked with an * in the table).

Mkt year 1/	Prod'n	Feed use	Dom Disapp	Exports	Ending stocks	Stx/Use%	USDA Av $
(MMT)
1986	524.082	113.192	511.348	89.274	191.05	*31.8%	2.42
1987	497.881	113.646	530.286	111.565	158.645	24.7%	2.57
1988	495.018	103.981	519.638	105.151	134.025	21.5%	3.72
1989	533.152	103.668	531.011	103.419	136.166	21.5%	3.72
1990	588.046	130.089	553.676	103.843	170.536	25.9%	2.61
1991	542.904	113.82	551.47	109.948	161.97	24.5%	3
1992	561.646	110.918	547.617	110.039	175.699	26.7%	3.24
1993	558.035	107.971	552.371	103.717	181.363	27.6%	3.26
1994	523.188	99.559	542.419	98.215	162.132	25.3%	3.45
1995	537.927	91.922	544.785	99.195	155.274	24.1%	4.55
1996	582.609	96.652	573.429	106.903	164.454	24.2%	4.3
1997	609.959	100.948	577.457	104.413	196.956	28.9%	3.38
1998	589.96	103.649	579.066	101.284	207.85	30.6%	2.65
1999	585.817	98.923	585.141	113.449	208.526	29.8%	2.48
2000	582.787	109.846	583.957	101.195	206.051	30.1%	2.62
2001	583.871	111.942	587.076	105.783	203.297	29.3%	2.78
2002	569.667	116.141	602.226	105.341	169.109	23.9%	3.56
2003	555.689	101.68	581.474	108.519	135.912	19.7%	3.4
2004	626.747	110.715	605.591	111.081	156.427	21.8%	3.4
2005	618.828	117.699	616.153	117.394	153.28	20.9%	3.42
2006	596.688	113.084	618.852	111.559	133.491	18.3%	4.26
2007	612.228	105.024	614.35	116.39	128.475	17.6%	6.48
2008	684.784	123.963	636.779	144.121	170.062	21.8%	6.78
2009	688.18	123.295	651.005	136.764	204.078	25.9%	4.87
2010	650.662	117.745	654.537	133.04	199.308	25.3%	5.7
2011	698.682	149.753	691.209	157.644	199.495	23.5%	7.24
2012	660.373	139.429	688.089	138.069	179.022	21.7%	7.77
2013	716.518	127.262	691.08	165.926	196.998	23.0%	6.87
2014	730.375	132.334	700.367	164.229	222.247	25.7%	5.99
2015	738.415	141.712	713.685	172.787	244.355	27.6%	4.89
2016	756.4	147.04	739.09	183.36	262.31	28.4%	4.89
2017	762.88	146.63	741.98	182.47	283.69	30.7%	4.89
2018	730.9	139.2	734.75	173.67	284.11	31.3%	4.89
2019	764.5	139.16	747.98	191.46	300.62	32.0%	3.89
2020	773.66	141.03	757.78	193.65	316.5	*33.3%	4.65

So why are Chicago wheat futures prices being supported above $5.90 per bushel and KC hard red winter (HRW) wheat above $5.60, when we're looking at a near-record global surplus? Here are two points to consider: Tightening U.S. stocks and a lack of access to the mammoth Chinese stocks.

USDA made a larger change to the U.S. wheat ending stocks than the trade had expected. Imports were cut 5 million bushels (mb) due to the slow pace of incoming bushels. Exports were increased 10 million bushels on stronger white wheat demand. Expected HRW exports were reduced.

U.S. wheat stocks are shrinking: As this small table illustrates, the current forecast for 862 mb would be the smallest May 31 figure since 2015. The stocks-to-use ratio is loosely correlated to average prices and is also the tightest since 2014-15. We say loosely correlated because USDA is combining cash prices for five different classes of wheat in one number and also weighing those prices by the percentage of the crop marketed each month. Timing of the high within the marketing year can substantially influence the average price received.

Year	2014/15	2015/16	2016/17	2017/18	2018/19	2019/20	2020/21
End Stx	752	976	1181	1099	1080	1028	862
Stx/Use %	37.3%	50.0%	53.2%	55.5%	53.0%	49.2%	40.8%
Avg Cash	$5.99	$4.89	$3.89	$4.72	$5.16	$4.58	$4.70

Finally, keep in mind that China holds 51% of the projected global wheat ending stocks and that wheat is generally not available to the export market. Estimated wheat stocks outside of China (including those tightening U.S. stocks) would only be 155 mmt, a much "snugger" 20.6% of consumption after deducting Chinese use from the world number.

None of the above requires wheat to rally much from here, but the combination of an oversold market coming into this week and the tightening numbers above help explain why wheat bulls were the big winners on report day in the grain complex.

Alan Brugler may be reached at alanb@bruglermktg.com

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