EU Wheat Ends Lower Again

17/12/12 –- EU grains closed lower, with Jan 12 London wheat down GBP0.50/tonne to GBP217.00/tonne, with benchmark May 13 falling GBP1.50/tonne to GBP217.50/tonne and new crop Nov 13 GBP0.50/tonne lower at GBP190.00/tonne. Jan 13 Paris wheat fell EUR2.50/tonne to EUR257.75/tonne.

For Jan 13 Paris wheat this was the fifth lower move in six sessions, and for Jan 13 London wheat it was the sixth in seven.

The trade is still trying to figure out what is the right price for wheat following last week's bearish USDA data.

Last week was in fact the first upwards revision for world wheat production for some time - the USDA had pegged global output lower for six months in a row prior to last Tuesday.

This time round they found 3.7 MMT more wheat world-wide than in November, the main upwards revisions coming from China (+2.6 MMT), Australia (+1 MMT) and Canada (+0.5 MMT). That helped to raise world 2012/13 wheat ending stocks by 2.2 MMT to 177 MMT.

Of those stocks 44% are held by India and China, in addition the latter country alone in fact also holds more than half of global corn inventories.

China's production and stocks of anything are always shrouded in mystery, that they do have 55.5 MMT of wheat in hand looks questionable given the recent pick up in imports that we have seen from them. Meanwhile Rabobank estimate the Australian wheat crop at 20.2 MMT, which is 1.8 MMT lower than the USDA's revised forecast.

Tuesday's numbers also includes an unchanged review of wheat production in Argentina this year at 11.5 MMT. The Buenos Aires Grain Exchange forecast that at 9.8 MMT on Thursday and the neighbouring Rosario Grain Exchange pegged output even lower at 9.5 MMT late on Friday.

Whilst we are casting a critical eye over last week's USDA numbers it is also worth noting their surprise upwards revision for corn production in China - up 8 MMT to 208 MMT. That outshines even the normally equally optimistic China Grain Reserves Corp (Sinograin) who say that output is likely to be closer to 198 MMT.

Meanwhile the entire state of Kansas, the top wheat producing state in the US, is in at least "severe" drought and 78% of it is in the grip of "extreme" drought, according to the latest data from the National Weather Service.

The recent demise in Chicago wheat probably has more to do with fund liquidation (estimated at more than 22,000 contracts in the week through to last Tuesday) than a wholesale change in the fundamentals. Year-end repositioning and US "fiscal cliff" fears, and what damage a resolution might have on the US economy, appear to be encouraging a risk-off move.

Just a week ago, prior to the release of the USDA report, the differential between front month CBOT wheat and corn was 106 cents. Today that has narrowed to around 85 cents, a more than 10% switch.