The USDA report was bearish for all commodities. The market certainly reacted as such, with soybeans down 44 1/2 cents, corn down 2 1/2 cents and Minneapolis wheat down 8 1/4 cents on the nearby contracts.
Looking at projections made for the U.S. wheat crop, all of the October estimates were left unchanged except for exports, which were lowered by 50 million bushels or 1.34 million metric tons. This is understandable given the slow pace at which the crop year's exports are being reported. One thing to note is that hard red spring exports as well as durum exports were left unchanged from the earlier October estimate. Adjustments were made to soft red wheat exports where exports were 435,445 mt lower, and to hard red winter exports, which were lowered by 925,000 mt.
Looking at the global wheat situation, global supplies are forecast to be 1.9 mmt lower than forecast in October, as the carry-in was adjusted .3 mmt lower and overall production lowered by 1.6 mmt. Overall ending stocks, however, were increased by 1.2 mmt, with the biggest hit being a 2.5 mmt reduction in global wheat feeding.
The 174.2 mmt global carryout forecast for 2012/13 can be viewed in different fashions. First, it is a substantial drop from last year's 197.9 mmt global carryout. This works out to a 12% reduction. The average carryout over the past 20 years is 184.4 mmt, so globally, stocks are tighter than average. At the same time the USDA suggest that global stocks are 46 mmt, or 35.9% higher than the 20-year low ending-stock level faced in 2007, when stocks dipped to 128.2 mmt. Looks like one of those glass is half full versus half empty scenarios. It should also be noted that the International Grains Council released their latest production figures on Oct 25th and pegged the crop at 172 mmt, smaller yet than recent USDA estimates.
Perhaps the biggest opportunities with respect to wheat prices lie with the fact that a number of the largest production drops this year are taking place in countries which are also the world's largest exporters. With harvest still in progress, the jury may be out on the extent of the damages faced.
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The largest production drop from the October forecast was a 2 mmt correction in Australia to 21 mmt. The USDA has been slow to react to the expectations for a smaller crop in that country. Some estimates exist for production to be even smaller yet, while poor weather as of late has led to harvest delays due to excessive rainfall. Early indications are that protein levels are coming in lower than average, which may lead quality wheat buyers to North America. This most recent projection for Australian production would result in a 29% drop from the 29.52 mmt production achieved in 2011/12.
As a result of this lowering of Australian production, exports have been cut from the October estimate by 1.5 mmt to 16.5 mmt, after having exported 24.7 mmt last year. There was talk earlier of Canada surpassing Australia's exports to become the #2 global wheat exporter but this should now happen with little difficulty.
The USDA left Argentina's total production unchanged at 11.5 mmt from the October report. This is a drop of almost 26% from last year's 15.5 mmt. With harvest of their winter-wheat underway, some forecasters have called this crop as low as 10.1 mmt. Harvest delays due to excessive rainfall have also been an issue in this country. As a result, exports have been left unchanged from the October estimate of 5.5 mmt, down 56.7% from last year's exports of 12.7 mmt.
The Black Sea countries have had their production increased slightly by the USDA in this report. Total production in this region is forecast to be 32.23% lower than last year. Ongoing rumblings of export restrictions have not taken place so far although many in the industry simply see these countries running out of exportable stocks soon. Total exports from this region have actually been increased by 3 mmt from the October report. Russian exports are suggested to climb by 1 mmt and the Ukraine exports are forecast to grow by 2 mmt. While the notion of export bans has been an on-again, off-again subject, the Ukraine Grain Association suggested today that they expect a ban by December 1. Both Russia and the Ukraine are selling government-owned stocks into their domestic markets in order to help-stabilize domestic prices, which should be a sign that stocks are not plentiful.
One of the big surprises in export markets this year is India. Having exported 7,000 mt in 2010/11, 89,000 mt in 2011/12, they are now forecast to export 6 mmt, up from October's estimate of 5.5 mmt. It appears that logistical issues may be preventing them from shipping even more as they are sitting on significant stock piles. In fact, India's carryout in 2012/13 will be just higher that stocks held in Canada, Argentina, Australia and the European Union combined.
A report out today from Dow Jones indicates that China's total production of grains in 2012 has grown for the ninth consecutive year. China imported .93 mmt of wheat in 2010/11, 2.93 mmt of wheat in 2011/12 and today's report increased this year's imports to 2.5 mmt, up 1 mmt from the 1.5 mmt forecast in October. China's wheat imports were 196% higher in September than they were the previous September, suggested to be a result of their own production problems. Rumors that Canada has exported three to six cargos of wheat to China have not been confirmed, although this would be an important sign that they are in need of protein wheat. The National Australian Bank in Australia suggests that this Chinese demand is one of the key factors under-pinning the current wheat market.
Besides the harvest progress from Australia and Argentina, one other factor to watch is the dry winter wheat production area in the US. Crop ratings currently place this crop as the worst on record as it goes into dormancy, although the market impact will not necessarily be seen until much later.
Canada's supply and demand numbers for wheat were left unchanged from October in this report.
Cliff Jamieson can be reached at email@example.com
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