KSU Wheat Market Outlook in October 2016 – Strong U.S. Hard Red Winter Wheat Exports Provide a Positive Market Signal

An analysis of U.S. and World wheat supply-demand factors and 2016-2017 price prospects following the USDA’s October 12th Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports, and the market actions that have followed those reports are available on the KSU AgManager website (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/wheat-market-outlook-october-2016

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Summary

Overview

Since the USDA’s October 12th Crop Production and World Agricultural Supply and Demand Estimates (WASDE) report, U.S. and World wheat futures market prices have traded higher – with CME DECEMBER 2016 Kansas HRW Wheat futures gaining approximately $0.25 per bushel through Thursday, October 20th.   Results of the USDA September 30th 2016 Small Grains Summary report were fully incorporated into the October USDA estimates.

For the “current crop” 2016/17 marketing year, the USDA projected:

1) World wheat total supplies of 984.1 million metric tons (mmt) and total use of 735.7 mmt – both at record high levels,

2) that World wheat exports are trending higher with 174.7 mmt in the “current” marketing year – up from 172.0 mmt last year, and up from 164.4 mmt two years ago,

3) World wheat ending stocks at a record high 248.4 mmt compared to 239.7 mmt last year, and 216.1 mmt two years ago, and

4) World wheat percent ending stocks-to-use (S/U) of 33.76% – up marginally from 33.69% last year, and from 30.60% two years ago – up to their highest level in 15 years (since MY 2001/02).

Perspective on Current “Large Supply – Low Price Scenario” vs MY 2007/08

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 128.0 mmt and at least a 57-year low in percent ending stocks-to-use of 20.8% S/U both occurred in MY 2007/08, the last major World wheat “short crop” marketing year.  The numbers for MY 2007/08 compare to projections of 248.4 mmt ending stocks and 33.8% ending stocks-to-use projected for “current” MY 2016/17.  The “large crop-over supply-low price” situation that now exists in World and U.S. wheat markets continues to have a strong prevailing negative influence on World wheat prices.

Positive Wheat Market Factors Not Necessarily Being Accounted for 

However, the broader large crop-over supply-low price” situation in the World wheat market may be “masking” or “obscuring” at least a couple of other important market 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 exports of both U.S. Hard Red Spring (HRS) wheat (higher protein – good quality) and U.S. Hard Red Winter (HRW) wheat (moderate protein – good quality) relative to World wheat export competitors.  As evidence of this, exports of U.S. HRW wheat are running ahead of the pace needed to meet USDA projections – raising the possibility of improved U.S. HRW prices in coming months – helped by both low prices and acceptable protein and quality.

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 actually “contracted” or “diminished” in “current crop” MY 2016/17 compared to a year ago – to the tightest supply situation since MY 2013/14.

Relying of Future Supply-Shortfalls to “Adjust” the Market

Even so, given the broader World wheat market’s current focus – 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 “moderating” in recent months – also is a serious negative factor that is limiting U.S. wheat exports.  These factors have resulted in higher U.S. wheat ending stocks and % ending stocks-to-use, and have caused 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 50.154 million acres (ma) – down 4.845 ma (-8.8%) from 2015.  The USDA also forecast 2016 harvested acres of 43.890 ma which would be down 3.428 ma (-7.2%) vs 2015.  Based on record high 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 forecast to be 2.310 bb (vs 2.062 bb in 2015), with total supplies of 3.410 bb (up from 2.927 bb in “old crop” MY 2015/16), and total use of 2.272 bb (up from 1.952 bb in “old crop” MY 2015/16).

Given these numbers, the USDA projected “current crop” MY 2016/17 ending stocks of 1.138 bb (vs 976 mb a year ago), with percent ending stocks-to-use of 50.09% S/U (vs 50.0% last year and 37.2% the previous year).  U.S. wheat average prices are projected to be in the range of $3.50 to $3.90 (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 (1.125 bb vs 975 mb by USDA), and b) lower feed and residual use (240 mb vs 260 mb by USDA).

The resulting KSU “Higher Exports with Spring 2017 U.S. Wheat Development Problems” Scenario (20% probability) assumes for “current crop” MY 2016/17: 2.310 bb production, 3.410 bb total supplies, 1.125 bb exports, 240 mb feed & residual use, 1.008 bb ending stocks, 41.97% S/U, & $4.35 /bu U.S. wheat avg. 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, Moderately Higher Exports” Scenario (65% probability) assumes for “next crop” MY 2017/18: 47.624 ma planted, 41.696 ma harvested, 47.0 bu/ac trend yield, 2.063 bb production, 3.326 bb total supplies, 1.000 bb exports, 250 mb feed & residual use, 2.286 bb total use, 1.040 bb ending stocks, 45.49% S/U, & $4.10 /bu U.S. wheat average price; and

KSU Scenario B) “Lower Yield, Average Exports” Scenario (35% probability) assumes for “next crop” MY 2017/18: 47.624 ma planted, 41.696 ma harvested, 43.6 bu/ac lower yield, 1.914 bb production, 3.177 bb total supplies, 980 mb exports, 240 mb feed & residual use, 2.256 bb total use, 921 mb ending stocks, 40.82% S/U, & $4.50 /bu U.S. wheat average price.

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