Following the bearish US Department of Agriculture reports earlier in the month, Chicago Board of Trade wheat futures have settled into a lower trading range. Having bottomed out just above US413 cents a bushel, March futures failed to go above US427.25c/bu at the end of last week. That left the March contract trading at around the lower end of the early January trading range.
The market stalled last week when another round of weak US wheat export sales numbers were released. Almost regardless of all else, the CBOT wheat futures market seems to be focused almost exclusively on the level of US wheat stocks.
This is understandable, as internal stock levels will drive price levels within the US market, and wheat will only flow to export if internal prices are low enough to make exporting attractive. If prices in global markets are also weak, that will simply feed the weakness in Chicago as well.
And this is why the surprisingly high acreage estimate for US wheat plantings released this month is so important. It compromises the potential for US stocks to be rundown in 2018.
US wheat stocks peaked in 2016-17 at 32.13 million tonnes, up from just 16.065 million tonnes in 2013-14. Last year, stocks declined by 5.21 million tonnes, or 16.22 per cent, which is a good start. However, that has still left US stocks at a burdensome 26.92 million tonnes, with potential for that to lift a little if exports fail to meet targets for the remainder of this marketing year.
That drop in stocks was largely driven by a 24.61pc, or 15.46 million tonnes drop in production in 2017-18. That was the result of a reduced acreage, and severe drought in some regions, particularly for the spring wheat crop.
If the US has another small crop, stocks will decline by another five million tonnes or so, but that will still leave US stocks above 20 million tonnes. The problem is that last year’s small crop was driven by drought. Any move back to an average season for the US will see production lift, potentially reducing any stock rundown in 2018-19 to negligible levels.
Hence the importance of the acreage estimates. Another small US crop needs to be driven by a further contraction in acreage, and the numbers released from the US did not support that move.
So, the best bet is that the US crop will be bigger in 2018-19, slowing the pace of stocks decline, and leaving the US internal market oversupplied. The US will have to sharply increase exports to drive stocks lower.
The next problem is that stocks outside of the US and China actually increased by 3.32 million tonnes last year, thanks entirely to the huge crop in Russia. Right now it appears difficult for US stocks to decline in 2018-19, against the probability of a larger US wheat crop this year, coming up against very strong wheat supplies outside of the US.
This explains why Chicago futures are shrugging off the risks of winterkill to the US winter wheat crop, and the threat of expanding drought in the southern plains. If all it does is hold US wheat production at last year’s low level, it still does not fix the US stocks issue in a global market where supplies are plentiful.
Once again the focus returns to the size of the 2018-19 Russian wheat crop. It has to be small enough to allow a lift in US exports.