An analysis of U.S. and World wheat supply-demand factors and 2016-2017 price prospects following the USDA’s July 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/grain-marketing/grain-market-outlook-newsletter
Wheat Market Response to the July 12th USDA Reports
Since the USDA’s July 12th World Agricultural Supply and Demand Estimates (WASDE) report, CME SEPT 2017 Kansas HRW Wheat futures have traded lower. SEPT Kansas HRW wheat futures opened at $5.52 ¾ on 7/12/2017 – the day of the report – but closed lower to $5.38 ¾ that day. Since then, SEPT 2017 HRW wheat futures have moved lower to a close of $5.02 ¾ on Tuesday, July 18th.
That same day Kansas cash wheat price terminal quotes in central and eastern Kansas ranged from $3.98 ¾ to $4.47 ¾ per bushel – with basis ranging from $1.04 under to $0.55 under SEPT 2017 futures. In western Kansas, representative wheat elevator bids ranged from $4.05 to $4.34 per bushel – with basis ranging from $0.98 under to $0.69 under SEPT 2017 futures. Although cash prices have improved considerably from fall 2016 when many wheat bids had fallen to marketing loan rates or lower, basis levels are still “wide and weak” compared to historic Kansas wheat basis historic patterns.
Key World Wheat Supply-Demand Findings in the July WASDE Report
For the “new crop” 2017/18 marketing year (MY) beginning on June 1, 2017 the USDA projected the following. First, that World wheat total supplies would be 995.9 million metric tons (mmt) with total use of 735.3 mmt – both marginally lower than the record high levels of “old crop” MY 2016/17.
Second, that World wheat exports will also trend marginally lower to 178.4 mmt in the “new crop” 2017/18 marketing year – down from a record high of 181.6 mmt last year, but up from 172.9 mmt two years ago.
Third, that World wheat ending stocks would be a record high 260.6 mmt in “new crop” MY 2017/18 – up from the previous record of 258.05 mmt last year, and from a previous record high of 242.8 mmt two years ago.
Fourth, that World wheat percent ending stocks-to-use (S/U) would be 35.4% – up from 34.9% last year, and from 34.1% two years ago – rising to the highest level of World wheat supply-demand balances since 36.2% in MY 1999/00 and 36.5% in MY 1998/99.
Perspectives on Current World Wheat Stock Levels
For a perspective on how historically large World total wheat stocks and World wheat percent stocks-to-use now are, consider that in MY 2007/08 the 34-year low in World wheat ending stocks of 128.2 mmt and at least a 57-year low in percent ending stocks-to-use of 20.9% stocks/use both occurred. The 2007/08 marketing year was the last significant World wheat “short crop” marketing year to have occurred. The “tight supply-demand” situation in MY 2007/08 compares to the most recent USDA projections of 260.6 mmt ending stocks and 35.4% ending stocks-to-use projected for “new crop” MY 2017/18. The present “large crop-over supply” situation in World and U.S. wheat markets continues to have a prevailing limiting influence on U.S. and World wheat prices – even with recent drought-fueled moves higher in the market.
Wheat Protein Supply Concerns & the “World Less China” Market Situation
The broader “large crop-over supply-low price” situation in the World wheat market may be “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 typically less so. This factor helps exports of U.S. Hard Red Spring (HRS) wheat (higher protein – good quality) relative to World wheat export competitors. The drought conditions now occurring in the U.S. and Canadian hard red spring wheat producing regions has raised the demand and price premiums offered for high protein wheat supplies – whether they are from hard red winter wheat supplies or elsewhere.
Second, while the aggregate supply of wheat in World markets has grown, the supply of wheat from a “World Less China” perspective is projected to have actually “contracted” or “diminished” further in “new crop” MY 2017/18. “World Less China” wheat percent stocks-to-use have declined to the tightest level since at least MY 2008/09 when U.S. wheat cash prices averaged $5.70 /bu. If this “China supply isolation factor” eventually leads to noticeably tighter global supplies of available-exportable wheat in coming months, then it will likely have a significant positive impact U.S. wheat market prices in “new crop” MY 2017/18.
However, unless there is this change in the broader, overriding focus of the World wheat market away from aggregate global supplies to available “World Less China” supplies – it is likely that significant World wheat production problems and/or trade disruptions would need to occur in year 2017 in order to have wheat prices recover significantly in later 2017. Such disruptions elsewhere would likely cause the market to then focus on the limited availability of food quality wheat outside of China in the World market. Also, ongoing strength in the U.S. dollar exchange rate continues to be a negative factor limiting the competitive affordability of U.S. wheat exports in World markets.
USDA U.S. Wheat Supply/Demand Forecast for “New Crop” MY 2017/18
The USDA released their wheat production, supply-demand and price projections for “new crop” MY 2017/18 in the July 12th Crop Production & World Agricultural Supply and Demand Estimates (WASDE) reports.
United States’ wheat plantings are projected to be 46.567 million acres (ma) – down from 50.154 ma in “old crop” MY 2016/17 to the lowest level since the early 1900s. Harvested acres are forecast to be 38.115 ma (83.72% harvested-to-planted) – down from 43.890 ma a year ago. The 2017 U.S. average wheat yield is projected at 46.2 bu/ac, down from the 2016 record of 52.6 bu/acre.
Wheat production in the U.S. in 2017 is forecast to be 1.760 billion bushels (bb), down from 2.310 bb in 2015. Projected “new crop” MY 2017/18 total supplies are 3.084 bb (down from 3.403 bb in “old crop” MY 2016/17), with total use of 2.146 bb (down from 2.219 bb in “old crop” MY 2016/17).
The USDA projected “new crop” MY 2017/18 ending stocks to be 938 million bushels (mb) (vs 1.184 bb a year ago), with percent ending stocks-to-use of 43.7% S/U (vs 53.4% last year and 50.0% the previous year). United States’ wheat prices are projected to average $4.80 /bu – up from $3.89 in “old crop” MY 2016/17, but down from $4.89 /bu in MY 2015/16, and $5.99 /bu in MY 2014/15. It is estimated by Kansas State University that these USDA projections for “new crop” MY 2016/17 have a 50% probability of occurring.
Three Alternative KSU U.S. Wheat S/D Forecast for “New Crop” MY 2017/18
To represent possible alternative outcomes from the USDA’s July 12th projection, three potential KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “new crop” MY 2017/18.
KSU Scenario 1) “5 Year Avg Yield” Scenario (20% probability) assumes for “new crop” MY 2017/18 that the following occurs. This scenario assumes that there will be 46.657 ma planted, 83.72% harvested-to-planted, 38.115 ma harvested, 45.8 bu/ac 5-year average yield, 1.746 bb production, 3.030 bb total supplies, 975 mb exports, 150 mb feed & residual use, 2.146 bb total use, 884 mb ending stocks, 41.19% S/U, & $5.05 /bu U.S. wheat average price.
KSU Scenario 2) “Higher U.S. Wheat Exports” Scenario (20% probability) assumes the following for “new crop” MY 2017/18. Planted acres of 46.657 ma are associated with 38.115 ma harvested, 45.8 bu/ac 5-year average yield, 1.746 bb production, 3.030 bb total supplies, 1.200 bb exports (due to foreign crop problems), 125 mb feed & residual use, 2.346 bb total use, 684 mb ending stocks, 29.16% S/U, & $6.00 /bu U.S. wheat average price;
KSU Scenario 3) “Short U.S. Wheat Crop” Scenario (10% probability) assumes the following for “new crop” MY 2017/18. Planted acres of 46.657 ma, 83.72% harvested-to-planted, 38.115 ma harvested, 40.2 bu/ac low “crop stress” yield, 1.633 bb production, 2.917 bb total supplies, 975 mb exports, 125 mb feed & residual use, 2.121 bb total use, 796 mb ending stocks, 37.53% S/U, & $5.35 /bu U.S. wheat average price.