KSU Wheat Market Outlook in Early September 2016 – Considering the “World Less China” and MY 2017/18 Wheat Scenarios

An analysis of U.S. and World wheat supply-demand factors and 2016-2017-2018 price prospects following the USDA’s August 12th Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports, and the market actions that have followed those reports will be available on the KSU AgManager website on Wednesday, September 7, 2016 (http://www.agmanager.info/default.asp).

Following is a summary – with the full analysis-article for Wheat to be found at this web location:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter

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Summary

Market Action

Since the USDA’s August 12th Crop Production and World Agricultural Supply and Demand Estimates (WASDE) report, U.S. and World wheat futures market prices traded sideways through August 22nd and then declined sharply through the end of August before modestly recovering through September 6th.

World Supply-Demand

For the “current crop” 2016/17 marketing year the USDA projected: 1) World wheat total supplies of 985.3 million metric tons (mmt) and total use of 732.5 mmt – both at record high levels, 2) that marginally higher trade continues in World wheat exports with 170.7 mmt in the “current” marketing year – up from 170.6 mmt last year, and up from 164.4 mmt two years ago, 3) World wheat ending stocks at a record high 252.8 mmt compared to 241.9 mmt last year, and 216.1 mmt two years ago, and 4) World wheat percent ending stocks-to-use (S/U) of 34.5% – up from 34.1% last year and from 30.6% two years ago – up to their highest level in 15 years (since MY 2001/02).

For a perspective on how historically large World total wheat stocks and World wheat percent stocks-to-use are, the 34-year low in World wheat ending stocks of 128.7 mmt and at least a 57-year low in percent ending stocks-to-use of 20.9% S/U both occurred in MY 2007/08, the last major World wheat “short crop” marketing year.  The “large crop-over supply” situation that exists in World and U.S. wheat markets continues to have a strong prevailing negative influence on World wheat prices.

“Not So Easily Perceived” Wheat Market Issues

The broader “large supply – low price” situation in the World wheat market may be “masking” or “obscuring” at least a couple of other significant issues. First, while the quantity of wheat available in the World is plentiful, the available supply of high protein milling wheat is less so.  This factor may help U.S. Hard Red Spring wheat markets and other sources of moderate to high protein wheat in the U.S. and abroad.  Second, while the supply of wheat in World markets overall is growing, the supply of wheat in the “World Less China” is projected to have “contracted” in “current crop” MY 2016/17 compared to a year ago to the tightest supply situation since MY 2013/14.

It is likely that significant World wheat production problems and/or trade disruptions would need to occur in coming months and early in year 2017 in order to have wheat prices recover significantly by spring-summer 2017.  Ongoing strength in the U.S. dollar exchange rate – although it has been weakening or “moderating” in recent months – also is a serious negative factor that is limiting U.S. wheat exports, resulting in higher U.S. wheat ending stocks and % ending stocks-to-use, and causing U.S. and Kansas wheat cash prices to fall sharply – down to the marketing loan rate in most of Kansas.

USDA U.S. Wheat Supply/Demand Forecast for “Current Crop” MY 2016/17

The USDA projected 2016 U.S. wheat plantings of 50.816 million acres (ma) – down 3.828 ma (-7.0%) from 2015.  The USDA also forecast 2016 harvested acres of 44.093 ma which would be down 3.001 ma (-6.4%) vs 2015.  Based on projected 2016 U.S. wheat yields of 52.6 bu/ac (up from 43.6 bu/ac in 2015), 2016 U.S. wheat production is projected to be 2.321 bb (vs 2.052 bb in 2015), with total supplies of 3.417 bb (up from 2.917 bb in “old crop” MY 2015/16), and total use of 2.317 bb (up from 1.936 bb in “old crop” MY 2015/16).

Given these numbers, the USDA projected “current crop” MY 2016/17 ending stocks of 1.100 bb (vs 981 mb a year ago), with percent ending stocks-to-use of 47.5% S/U (vs 50.7% last year).  U.S. wheat average prices are projected to be in the range of $3.35 to $4.05 (midpoint = $3.70 /bu) – down from $4.89 /bu in “old crop” MY 2015/16 and $5.99 /bu in MY 2014/15.   It is assumed by Kansas State University that these USDA projections for “current crop” MY 2016/17 have an 80% probability of occurring.

Alternative KSU U.S. Wheat S/D Forecast for “Current Crop” MY 2016/17

As an alternative to the USDA’s projection, one potential KSU-Scenario for U.S. wheat supply-demand and prices is presented for “current crop” MY 2016/17 – and is given a 20% probability of occurring.  Assuming the same 2016 acreage, yields, imports, and production as USDA, as well as food and seed use, the alternative scenarios assumes a) higher U.S. wheat exports (1.075 bb vs 985 mb by USDA), and b) lower feed and residual use (320 mb vs 330 mb by USDA).

KSU “Higher Exports with Spring 2017 U.S. Wheat Development Problems” Scenario (20% probability) assumes for “current crop” MY 2016/17: 2.321 bb production, 3.417 bb total supplies, 1.075 bb exports, 320 mb feed & residual use, 1.396 bb ending stocks,  40.50% S/U, & $4.25 /bu U.S. wheat average price.

KSU U.S. Wheat S/D Forecasts for “Next Crop” MY 2017/18

Two alternative KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “next crop” MY 2017/18.  These scenarios assume a 5% decline in U.S. wheat planted and harvested acreage in 2017 (with a 7% decline for U.S. winter wheat, and no changes for other spring wheat and durum wheat classes.  These KSU projections also assume at least a continued moderation in the value of the U.S. dollar during the “next crop” 2017/18 marketing year, with some improvement in U.S. wheat exports as a result.

KSU Scenario A) “Trend Yield, Higher Exports” Scenario (65% probability) assumes for “next crop” MY 2017/18: 48.258 ma planted, 41.873 ma harvested, 47.0 bu/ac trend yield, 2.072 bb production, 3.287 bb total supplies, 1.000 bb exports, 250 mb feed & residual use, 2.286 bb total use, 1.001 bb ending stocks, 43.79% S/U, & $3.95 /bu U.S. wheat average price; and

KSU Scenario B) “Lower Yield, Average Exports” Scenario (35% probability) assumes for “next crop” MY 2017/18: 48.258 ma planted, 41.873 ma harvested, 43.6 bu/ac lower yield, 1.922 bb production, 3.137 bb total supplies, 980 mb exports, 240 mb feed & residual use, 2.256 bb total use, 881 mb ending stocks, 39.05% S/U, & $4.35 /bu U.S. wheat average price.

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