Global stocks to rise

Despite the threat of winterkill in the US, European Union (EU) and Black Sea, and despite the lift in importer demand against the lowest US futures prices since 2010, wheat has failed to respond positively.

There is no doubt demand for wheat has lifted in the past couple of weeks, with Middle East buyers placing large orders into the market.

However, the US is still not getting enough of this business, keeping pressure on futures prices as other exporters make more sales than the US.

Australia has made some sales, but could not deliver against March shipment deadlines because shipping capacity was already committed.

Focus is beginning to turn towards the 2014 season as well.

Global production is expected to fall, simply because 2013 was such a good year generally, and production will drop as yields globally return to average levels.

So, although the total area planted to wheat is expected to go up, output is likely to fall.

There is also a growing risk for winterkill in the US, EU and the Black Sea region.

To date the market has not speculated too much on this, preventing significant risk premiums being built into prices.

Two bouts of extremely cold weather in the US are expected to have done some damage to their winter wheat crop, but while some areas had limited snow cover, other areas were well covered and should be immune.

The risk is now increasing in the EU, where above average temperatures and rain have improved conditions for winter crops.

However, the same conditions have prevented those crops from hardening, reducing their tolerance to low temperatures.

This decrease in frost tolerance is evident across a number of countries, including France.

While wheat production is projected to fall year on year in 2014, consumption will also be under pressure as livestock feeders move from wheat back to cheap corn.

The end result is still an expectation global stocks will lift in 2014.

If production in Australia also returns to normal, so supply deficits are relieved on the east coast in November and December, year on year wheat prices will be significantly lower.

The biggest affect will be on prices in the Newcastle zone, as they return to export parity.

Export parity in South Australia and Western Australia is also likely to be lower than the $269 a tonne average we saw for this harvest in South Australia.

New season export prices are already down to $255/t, but could conceivably go lower if global production issues don't assert themselves on the market as 2014 unfolds.

Recent lows for wheat have been average harvest cash prices of $212/t in 2009 and $220/t in 2011.

Current International Grains Council projections see global stocks lifting another six million tonnes this year.

That should not be enough to push prices to those recent lows, but may see further downside from current levels.

That is going to make it important to capture any weather driven rally in new season wheat prices during the next six to eight weeks, while at the same time making any sales within the context of our own production risk, and the risk the global crop may deteriorate from current expectations as well.

Malcolm Bartholomaeus is a market analyst for Bartholomaeus Consulting, Clare, South Australia.