It was a week ago Friday that I showed a historical chart of ending stocks-to-use ratios for world wheat in DTN's Closing Market Video with Senior Ag Meteorologist Bryce Anderson. In the July 12 World Agricultural Supply and Demand Estimates (WASDE) report, USDA reduced wheat crop estimates for Europe, Australia, Russia and Ukraine, and September Chicago futures responded by closing up 25 1/4 cents in two days.
Friday's video showed a world ending stocks-to-use estimate of 34.8% for 2018-19, down from 36.9% the previous year, but not much of a change. In fact, 34.8% of annual use ranks close to wheat's highest world ending stocks-to-use ratios of all time. There just didn't seem to be any reason to get excited about the possibility of wheat prices trading significantly higher.
By Tuesday morning, I had to change my mind. Not that prices are ready to rocket higher anytime soon, but as DTN Contributing Analyst Joel Karlin pointed out in his "Fundamentally Speaking" blog, if we bypass China's wheat stocks and look at the ending stocks of the world's top seven exporters, Karlin's ending stocks-to-use ratio comes to 22%, which is the lowest since 2012-13.
In the past, I kept my own version of these numbers, but had not yet updated them for 2018-19. Part of the reason was because I figured, "why bother," as world wheat stocks were still so high. Thanks to Professor Karlin, I went back and looked again.
At this point, you may be wondering why anyone would factor out China's ending stocks, and the answer is that China does not export much wheat to the world. We could also say the same for India as both countries tend to be self-sufficient in this basic food staple.
Going by USDA's estimates for 2018-19, the world's top seven exporters of wheat supply 86% of the world's imports. Focusing on just their ending stocks gives us a better sense of just how much excess wheat is actually available for the world's markets.
The top seven exporters in 2018-19, arranged from highest production to lowest are: European Union, Russia, U.S., Canada, Ukraine, Australia and Argentina. Wheat's Magnificent Seven is expected to have 50.28 million metric tons (mmt) or 1.85 billion bushels (bb) of surplus wheat at the end of the current season, down from 2.47 bb at the end of 2017-18.
This season's biggest reductions in supplies came from Russia and Europe where wheat exports were flying off the shelves. Meanwhile, the U.S. struggled to give wheat away.
If USDA's estimates are close, the U.S. will hold 53% of this group's ending wheat stocks in 2018-19 while Europe holds 21%. The remaining 26% are split among the remaining five.
As I see it, the current situation is not immediately bullish for U.S. wheat prices because the U.S. and Europe still have plenty of supplies to offer a margin of safety, at least through the end of this calendar year. Also, while there have been some production problems in 2018, we can't say yet that any have risen to the level of a major threat.
However, what we do need to recognize is that the world's exportable excess of wheat is slimmer than it has been in six years. We could be just one or two unexpected events away from a tight supply situation.
Moving forward, we will be keeping an eye on wheat's U.S. export pace, as well as spot Chicago wheat prices in relation to their 2017 high of $5.53 1/2 (below, for now) and any signs of commercial buying in wheat's futures spreads. Special thanks to Joel Karlin for alerting us of this important change in fundamentals. I'm glad I read DTN!
Todd Hultman can be reached at Todd.Hultman@dtn.com
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