The Morning Muse
25/03/11 -- Brussels announced late yesterday that they'd issued soft wheat export licences for 364,000 MT last week, bringing the marketing year to date total to just under 15 MMT with 14 weeks left to go in 2010/11.
That puts us around 2 MMT, or 15%, ahead of this time last year.
Meanwhile the IGC yesterday raised its estimate for world wheat production last year by 1 MMT to 649 MMT, but also increased 2010/11 consumption by a similar amount to 662 MMT, leaving ending stocks unchanged at 185 MMT.
Looking ahead to the coming season they pegged world grains production at a record 1.805 billion MT, slightly above the previous 2008/09 record of 1.802 billion. Wheat production will account for 673 MMT of that, an increase of 3.7%, they said. That would be the second largest world wheat crop ever, only failing to beat the 2008/09 record by 13 MMT.
Can 13 MMT, or less than 2% of global output, really be the wafer thin gap
between "burdensome" and "tight" accounting for whether UK wheat is GBP90/tonne or GBP200/tonne?
The FAO pegged 2011/12 world wheat production at 676 MMT earlier in the week, making that gap even narrower.
Are We Nearly There Yet Dad?
24/01/11 -- New crop November London wheat has set a fresh contract high of GBP173.50 this morning, up GBP1.50 on the day so far. Front month March Paris wheat has also set a lifetime high of EUR263.75/tonne, and currently trades just below that, up EUR3.50 on the day.
Resurgent Chicago wheat is up 12c on the overnights, adding to 21c gains on Friday, boosted by robust weekly export sales of over 1 MMT. The pace of French sales has to slacken off now as we enter the second half of the 2010/11 marketing year, that leaves the door open for the US, and to a more limited degree Argentina and Australia to boss the export arena.
The world's major wheat buyers haven't stopped buying wheat, if anything they've upped the pace as if they're frightened that we're going to run out. We aren't, but they don't know that do they? So we'd better let them have just one or two more cargoes just in case. Tunisia bought 100,000 MT of optional origin hard wheat again on Friday.
In the UK, GBP160/tonne ex farm is now widely achievable for new crop wheat off the combine. The current futures spread suggests that would value August 2012 as available at around GBP135/tonne - would that be the sale of the century or fools gold?
Random Thoughts Of An Inane Mind
19/01/11 -- The wheat market appears to have recovered from a little early 2011 wobble, and seems to have the bit firmly back between it's teeth again this morning in an attempt to press on into higher territory.
Whilst old crop flirts with trying to pop above GBP200 again, plenty of people also now seem to be buying into the longevity of these prices too. New crop Nov11 London wheat is currently trading at GBP171.50, within GBP1.50 of the all-time high for the contract set on the opening trading day of 2011. A close at that tonight would be a record close for the contract.
Even Nov12 is starting to attract peoples' interest now, currently GBP1.50 higher at GBP146.50, a seemingly attractive GBP25 discount to Nov11.
Unease about the unrest in North Africa seems to be rippling around the market, with the likes of Turkey, Libya, Morocco and Jordan all coming in to buy wheat just as Algeria decides to refill it's boots.
FranceAgriMer currently project French wheat ending stocks at a tight 1.96 MMT, what they haven't perhaps told us is that those stocks are going to be in North Africa not France!
Looking around the globe, possibly the next catalyst that could send the market surging into new uncharted waters might come once winter wheat starts to emerge from dormancy in the spring.
We know that US wheat went into dormancy in a pretty poor state. The question now is how is it going to come out of it? In the case of Kansas, which accounts for almost a quarter of the entire US crop, probably not very well at all is the most likely answer.
In the last USDA weekly crop condition report ahead of the winter, based on conditions as at Nov 28 2010, Kansas wheat was rated 25% poor/very poor, and only 37% good/excellent. By the end of the year those ratings are said to have declined to 33% poor/very poor and only 27% good/excellent.
This autumn/winter has been "one of the driest planting seasons on record in the top US wheat state, and a bad omen for new crop production," say Martell Crop Projections.
Large areas of planted US winter wheat regularly don't make it through to harvest as failed fields are grazed or ripped up and replanted with other crops in the spring. It would seem that we have the potential for even more of this practice to occur this year, especially with alternative crop prices offering such lucrative returns at the moment.
The markets perception of the implications of a significant Kansas wheat crop failure are more important than what the real implications might be.
Right, were did I put that panic button...
Calling A Top In The Wheat Market
15/01/11 -- I got invited to speak to a group of agri-reps a few months ago, my brief being to explain to them where the grain markets were currently at, and where they were going. I told them that it was a bit like trying to pick the winner of the Grand National months before the race, when you don't even know the going or the weights or anything.
Calling a top in the wheat market isn't exactly an easy thing to do, but there's no harm in trying is there?
I've said for a while now that I quite fancy May, and I'm still reasonably content to go with that. Here's a bit of a rationale behind my thinking.
It's seems pretty clear that UK and EU exports are running well ahead of themselves, and that availability is going to be tighter than a duck's you know what come the spring. So it seems a bit strange not to think that prices will peak in July, just before the harvest kicks off.
Certainly that is what the London futures market seems to be indicating, with July the only month to close above GBP200/tonne on Friday, and there then being a steep GBP32.75/tonne decline into new crop November.
Historically however there is a strong precedent for UK wheat prices to peak before new crop comes along, in May. Having searched the Internet high and low for a chart to back this theory up, and drawn a blank, there was only one thing for it - to gather the information necessary and produce one myself. And here it is:
As you can see, that chart is based on the last twenty years worth of information. It seems that the impending threat of harvest is frequently enough to get the market into decline well before July comes along.
I can already hear you saying, yes Nogger that might happen in a "normal" year when we are clearing the decks and trying to make room for new crop, but 2011 is not a "normal" year. And you may well be right, and there is no denying it - unless you are Defra of course.
So here's a few things to consider in this abnormal year:
1. Hefty compound feed price increases are on the cards come May. If the livestock sector can't afford current levels they certainly aren't going to fancy stumping up what's likely to be thrust in front of them in late spring.
2. Livestock numbers are in decline as producers the world over up slaughterings on the back of soaring feed costs.
3. The slump in demand associated with turnout time could be particularly acute this year I feel.
4. I wonder idly outloud if our chums at a leading grain merchant have a significant volume of old crop wheat put to one side with "new bioethanol refinery - DO NOT TOUCH" written on it. If so, and if/when it becomes clear that said refinery isn't going to be ready to open during the current crop year then that could mean a ruck of wheat coming back onto the market. May/July is the premium position after all, so it would make no sense whatsoever to carry it into Aug/Oct would it?
5. The US wheat harvest will have started in the south by May, and despite market rhetoric US stocks are already very comfortable - the second highest in the past decade in fact.
That's my thoughts on the matter anyway.
Oh, I almost forgot....Becauseicouldntsee 30/1 on Betfair for the Grand National. Nailed on cert that is!
The Future Of The UK Wheat Market
11/11/10 -- Suddenly wheat growers have never been so popular. By the time Vireol get going I foresee a situation when selling wheat will be a bit like going to one of those huge car supermarket things you see next to the motorways.
"You've got 500 tonnes of wheat to sell sir? This is your lucky day, if you sign on the dotted line right now we'll throw in an MP3 player, a Goblin teasmade, two pounds of sausages and a pigs dick for the dog."
Either that or people will be advertising on telly to buy your unwanted wheat.
"Simply pop your unwanted wheat into the supplied jiffy bag and wait for the cheque in the post. Make sure your diamond ring doesn't get mixed in with it now, as we don't want any of that old rubbish."
Keep it quiet right, but I know a man, who knows a man who's uncle grows wheat. Fields full of the bloody stuff he's got. I might be able to get you, erm, an intro like - for a nominal fee of course guv. Five hundred sheets and a week in Marbella should cover it like. I'm sellin meself short at that as well. Come on, think of the kids.
Distant Alarm Bells Ringing
26/10/10 -- Last night's USDA crop condition report for wheat, the first of the season, placed only 47% of the crop in good/excellent condition. That's the crop's worst start to a season in at least fifteen years.
It wouldn't be such a major concern if it wasn't coming on the back of this season's problems in Russia and Ukraine. The hangover from drought earlier in the year there means that winter sowings are going to be significantly reduced in the case of Russia, and have got into the ground late in the case of Ukraine, leaving crops vulnerable to winterkill should we get a harsh winter.
The world is looking pretty heavily reliant on the US to fill the void in wheat availability this year, and luckily they have plenty with which to do it. After two years of stock replenishment the US, whether by luck or by judgement, have refused to get drawn into the "wheat price war" instigated largely by cheap Black Sea sellers, and have stood away from the market.
This leaves them with more than ample wheat stocks with which to supply the world in 2010/11, with ending stocks there still projected to be the second largest in the last ten years - even with the increase in sales this season.
The alarm bells are however already ringing in relation to next season's crop on the back of last night's crop condition ratings, as we really need a decent wheat crop out of the US next year. They are after all the world's largest exporter.
Whilst dryness in the Great Plains was alleviated somewhat by rains at the weekend, prompting ideas that next week's crop condition ratings could in fact show an improvement, it has already caused late emergence. With that comes lack of maturity heading into winter.
Drier and warmer weather than normal is the forecast for the US bread-making wheat states for the next fortnight. Even with the weekend rains factored in "the rainfall plot for Dodge City, Kansas, still shows a 3.7 inch moisture deficit for the period August 1- October 23," say Martell Crop Projections.
This August-October rainfall deficit is being blamed on La Nina, now having reached the "strong" phase. The Climate Prediction Centre believes La Nina will now persist through the Northern Hemisphere winter, they warn.
US winter wheat harvested acres are frequently significantly less than planted acres, with poorly established crops often being turned over to cattle for grazing in the spring rather than being harvested. An additional "risk" to winter wheat this season may be the price of corn. If that holds up at current levels there may be an increased temptation amongst some US farmers to rip up their wheat in the spring and give corn a shot instead.
EU wheat exports will likely have dried up by then too, meaning that the wheat availability picture could look a whole lot tighter if it looks like we are facing a reduced US crop and another disappointing year from Russia and the FSU.
No wonder those 2011/12 discounts are eroding.
NFU Crop Estimates
The NFU were out yesterday with an ENGLISH wheat production estimate of 13.5 MMT, only marginally up on last year despite a higher acreage.
"Despite increased plantings production, this year is expected to be very similar to last due to lower yields. Production will be down on the five-year average by around 400,000 tonnes," they say.
It may be worth considering that twelve months ago the NFU pegged the English wheat crop at 12.9 MMT and the UK crop at 13.9 MMT. Both estimates subsequently proved to be half a million tonnes too low.
They haven't yet put a figure on barley output, but one is expected in the next fortnight. By coincidence last year's September barley estimate was also around half a million on the low side.
The dry spring is being blamed for lower yields, it will be interesting to discover if they see that being replicated in Scotland, where the wheat harvest is ongoing.
New Month, New Money?
September is here, and with it we herald the arrival of lots of new money from those nice fund chaps Tarquin, Peregrine and Ptarmigan. They might not have ever kissed a girl or started shaving properly yet, but they do know how to splash the cash these lads.
They've boxed off their August bonuses, paid for a relaxing fortnight in Sandals resort somewhere in the Caribbean and are back refreshed looking to throw lots of cash into wheat, corn and soybeans - so the only way is up. At least that's the theory.
There are a few signs however that September might not provide the bulls with such an easy ride on the coat-tails of the splash the cash brigade.
For one thing, corn and soybeans have a strong seasonal tendency to decline in price during September and October as the harvest in the US gets into full swing.
September is also the front month for CBOT beans, corn and wheat. The likely lads aren't going to want to go pouring their money into any of these nearby contracts that's for sure. That's far too much like getting involved in the cash market.
The disparity between CBOT wheat and cash wheat in the US was highlighted yesterday by there being 4413 deliveries on the first notice day of the September contract. To put it another way, guys with sales on for September Chicago wheat decided that to deliver physical wheat against those sales was a better course of action than closing those contracts out at current prices. To the tune of 4413 lots. Which is just over 600,000 MT. On the very first day that they were able to do so.
Even deliveries against both the premium wheats of the Minneapolis and Kansas wheat contracts were also larger than expected yesterday.
This certainly seems to be telling us that the physical cash wheat market isn't as strong as some would like to make out. You will also note the fairly large differential between September and December on CBOT wheat - 33 1/4c as at last night's close.
Meanwhile across the pond, Paris wheat open interest for front month November peaked at over 141,000 contracts on Monday. The equivalent of more than 7 million tonnes. Tarquin and his batty boys have indulged in such a feeding frenzy here that the open interest in November wheat is almost as high as some estimates for the entire French exportable surplus this season. And in doing so they've managed to push November up to a seemingly inexplicable EUR6.75/tonne premium to March 2011.
Open interest fell by 5,000 contracts last night. Is that a sign of the first of the smart money getting out? That will certainly be another thing to keep an eye on in the coming weeks.
Cracker Wheat?
British (who else?) scientists say that they've cracked the genetic code for wheat, helped by Ian Botham and that really large shredded wheat off the telly.
Boffins from the University of Liverpool say that they were "just passing" Elstree studios one day when Ian Botham offered them the 14 foot tall shredded wheat in exchange for a lift home as his feet were killing him.
Cracking the human genome took fifteen years, but the scholarly Scousers took only a year to crack the wheat genome despite it being five times more complicated. Most of their work was done during Liverpool home games, so there was nothing to distract them, they said:
Genome breakthrough heralds new dawn for agriculture
Fifty pound/tonne inside five years?
A British scientist in Liverpool
More Inane Ramblings
London and Paris wheat have rebounded this morning I see on talk that Russia may end up importing up to 5 MMT of grain in 2010/11. With a crop of the anticipated 60 MMT and consumption of around 75 MMT there's certainly a 15 MMT deficit looking to be found.
Official carryover stocks at the end of the 2009/10 marketing year were 24 MMT, although unofficial estimates suggest that it was probably nearer 20 MMT. In theory that should make imports unnecessary, although we've no idea what the quality of these carryover stocks is of course.
Buddies Kazakhstan appear to be waiting in the wings to assist after increasing their export estimate by 2 MMT today. Of course it probably hasn't escaped anybody's notice that Russia help provide the landlocked Kazakhs with a gateway to important export homes to the west. It won't therefore take too much persuasion to ensure Kazakhstan's assistance if Russian imports are required when you look at the bigger picture.
In short if Russia do need to import, then it's highly likely that much of their needs will probably be Kazakh grain which wasn't destined to come onto the market this year. Effectively Russia may be "borrowing" some of Kazakhstan's own grain reserve safety net. And Kazakhstan probably isn't in much of a position to say no.
London wheat in particular needs an up day, having already fallen GBP8.50/tonne this week prior to today's session. It is also faced with a suddenly stronger pound following much better than expected July retail sales figures.
I still expect further price weakness ahead for EU wheat once the harvest wraps up and the inevitable increased winter wheat plantings start. That will also coincide with fund money exiting their November long positions. After that I can see some price appreciation as winter demand kicks in, and the cheaper sellers run out. By late spring however, assuming normal crop development and barring any further weather scares the market will begin to focus on the impending arrival of another bumper crop, the third in the past four years:
Click chart to enlarge
Some Interesting Facts And Figures
During a heavy weekends research in preparation for various projects I currently have on the go I've done quite a lot of digging into the 2007/08 wheat price surge and stocks & usage back as far as the early 90's.
From a UK perspective the big rally of 2007/08 began in early June (spooky coincidence maybe?).
On 1st June 2007 front month London wheat was GBP99.50/tonne, by the end of September it was trading at GBP180/tonne. Prices then had a shake out falling to GBP145/tonne by mid-November before surging to fresh front month all-time highs in February 2008 of GBP192.50/tonne.
Then the bubble burst, we were down below GBP100/tonne by the end of September and sub-GBP90/tonne before the middle of October.
Another interesting fact for you is that despite the USDA raising their US export hopes last week by 6 MMT for 2010/11 to 33 MMT, projected wheat ending stocks in the US are still the second highest in the last ten years. And even with sharp reductions all round to production from the FSU, the world wheat ending stocks to use ratio for 2010/11 is still the second largest in the past eight years:
Another interesting statistic comes from analysing where these wheat stocks actually are. Back in the tight S&D year of 2007/08 the world's top exporters* accounted for 40 MMT of world wheat ending stocks, in 2010/11 that figure is set to be almost 35% higher at just under 54 MMT.
Where are those stocks? They're all in America, who now look well placed to reap the benefits of not competing aggressively with Black Sea discount sellers during the past couple of seasons, meaning that their stocks have risen more than threefold from 8 MMT to almost 26 MMT.
* Argentina, Australia, Canada, Europe, Kazakhstan, Russia, Ukraine and the US.
Wheat: Is It Really 2007/08 All Over Again?
After a torrid week, now that the phones are silent I thought I'd sit down and try and make some sense of the wheat market, to attempt to analyse just how bad things are and if the recent surge in prices is really justified.
Let's start by having a look at the good old fashioned supply and demand perspective.
SUPPLY
The USDA currently have global wheat production in 2010/11 at 661 MMT, that includes 53 MMT from Russia, 14 MMT from Kazakhstan, 20 MMT from Ukraine and 141.8 MMT from the EU-27. It seems pretty clear that all of those numbers are too high, collectively around 19 MMT too high by my estimates in the table lower down on the right.
Knocking 19 MMT off the USDA's world production estimate gives us a probably more accurate figure of 642 MMT. (Much of the reason for the difference between that number and the total I have is down to China. At this stage that discrepancy doesn't matter too much, unless we were to see China suddenly emerge as a large importer of wheat).
DEMAND
The USDA say that the world will consume a record 667 MMT of wheat this year, with prices having risen so sharply that is probably also overestimated but let's run with it for now.
By the wonders of my mathematical brain, that tells me we are going to be 25 MMT wheat deficient in 2010/11, which equates to around fourteen days worth of consumption. Effectively that puts us all on a fortnight's wheat-free diet.
STOCKS
If we don't want to go on this diet then we're going to have to eat into last season's reserves. According to the USDA there was 193 MMT of those at the end of 2009/10, or 105 days worth of consumption.
PANIC OVER THEN?
Hurrah, bacon sarnies all round. We CAN still manage to munch our way through 2010/11 without needing to give up bread for a fortnight AND still have more than 90 days worth of stocks to fall back on.
Although of course where those stocks are is pretty important, I mean we can actually get at them can't we?
Well, our mates the Indians held about 16 MMT of them, and I think I'd rather take the fortnights diet option than attempt to munch my way through what they've got in store. Our other chums of truth economy the Chinese were supposed to have 56 MMT in reserve at the end of last year. If they really did have is immaterial at the moment, as we know that it's pretty likely that whatever they've got they aren't going to be wanting to sell it to us are they?
Egypt were sitting on a further 5 MMT, and they're most certainly not going to be selling that. Not with a huge question mark now hanging over whether the Russians are going to ship any of their existing commitments when the export ban comes in a week from now.
The truth then seems to be that of this 193 MMT some 76 MMT isn't going to be coming onto the market any time soon, whittling "rest of the world" 2009/10 reserves down to around 117 MMT.
So let's take this wheat hungry trio out of the equation and have a look at...
THE REST OF THE WORLD
Us lot will account for 463 MMT, or around 70%, of world consumption this year. We had 116 MMT (difference due to rounding) of the world stocks at the end of 2009/10, or enough to keep us going for 91 days. We're going to produce 459 MMT, according to the USDA, but remember that this figure is probably overstated by 19 MMT re Russia, Kazakhstan, Ukraine and Europe.
Factoring the 19 MMT overstate in means we're going to eat 23 MMT more wheat than we produce this season, which would drop our reserves below 100 MMT - 76 days worth of supply. And that's without the current market price rationing demand.
In the last big price spike of 2007/08 that figure fell to only 45 days.
In the "awash" and "glut" days of 2009/10 the rest of the world was sat on 94 days worth of wheat, we're still significantly closer to that than we are to 2007/08.
CONCLUSION
Whilst there is certainly some justification in the recent price rally, the fundamentals of supply and demand don't really warrant one of this magnitude. Although there are legitimate concerns over winter wheat planting prospects in Russia this year, European and US farmers will be only too keen to embrace the current price levels with significantly higher sowings. That is exactly what they did for the 2008 harvest which saw EU output up by 26% and US production up by 22%.
Despite London, CBOT and Paris wheat all closing higher on the week, all three actually closed nearer the bottom of the week's trading range than the top.
Is the top already in? That as ever is a difficult one to call, and the funds are certainly likely to have another attempt at sending it higher again. I'm tempted though to say yes, so beware of the "bull trap". Somebody paid GBP169 for November London wheat last week, I guess that could easily fall into the "delusion" category.
There's now 6.4 MMT worth of open interest in November Paris wheat. I think I'd rather be first out than last out if I was sitting on that.
Footnote: I treated myself to an afternoon in the pub Friday, the taxi driver and at least three other people I met with no involvement whatsoever in the grain trade all wanted to talk to me about wheat. That probably tells you all you need to know.
Haven't Seen The Word 'Awash' Just Lately
Or 'burdensome' come to that. Back refreshed from a weekend away with MrsN#3, and looking forward to a fun-packed week I wonder idly this morning how awash we really are we with wheat now, and has the overall picture really changed that much?
With EU wheat prices having risen by a third in little more than a month or so, you'd certainly think so.
The USDA currently say that 2010/11 will finish with wheat ending stocks of 187 MMT, in round figures that's still 50% more than in 2007/08.
It's maybe more than slightly disconcerting however to not that almost half (48%) of this 187 MMT is in China, India, Egypt and Syria (2007/08: 42%). None of these countries are noted for their export prowess, and at least two of them are bent as a nine-bob note. Additionally the quality of these stocks is questionable certainly in the first two. China alone currently accounts for 35% of all the wheat ending stocks in the world (2007/08: 31%).
Based on those numbers it certainly seems that the world's wheat reserves are getting more concentrated into fewer hands, and seemingly those of traditionally non-exporting nations are holding an increasingly larger slice of the cake.
In the case of China we have a country with a proven track record of exaggerating production numbers. In the case of India we have a country with a long history of stock mismanagement. And Egypt hardly have an unblemished record in any category you wish to chose from. It seems fair to assume that a fair chunk of the world's wheat either isn't really there, or at the very least is well past it's sell-by date.
Mother Nature it appears hasn't been overly kind to "Poundland" - the FSU - in blessing them with another seemingly unlimited volume of new crop grain to greedily exchange for cash this year either.
So the EU might actually get a look in on the export front this season, especially if the euro doesn't recover too much. The US has of course got plenty of wheat to export itself, and will be looking to offload some of the weighty reserves it has built up steadily since 2007/08, they've more than trebled in that time frame.
Is It 2007/08 All Over Again?
The overnight wheat market is lower, although not by much, no doubt on a bit of profit-taking as traders await to see if more money will pour into the market today, or if we've gone high enough for now.
London's near ten quid rally yesterday was all the more impressive given that it took place as the pound rose above 1.54 against the dollar. In the past three weeks Nov London wheat is up GBP27.25/tonne, and Nov Paris wheat up EUR36/tonne. Both 26% increases.
What's changed in that time frame (apart from the England squad realising that there not as good as they thought they were)? The Russian and Kazakh drought was certainly well documented then, as was flooding in eastern Europe. If anything French and UK wheat prospects have stabilised and maybe even improved a little, we have at least had cooler temperatures and some rain.
The USDA have come out with some rather bearish numbers on wheat stocks and supply. We've found out that the US HRW crop is better and bigger than we thought. Crop conditions in Western Australia have improved with rain and there's talk of a possible bumper year there in the east.
The harvest in Ukraine has stalled on persistent wet weather, but what has been brought in is yielding maybe a bit better than what was expected.
Which brings us all the way back to Russia/Kazakhstan as being the main bullish driving force behind this rally. I've knocked 5 MMT off my production estimates for these two combined in the past three weeks, or around 0.8% of world production. Are stocks so scarce that losing 5 MMT justifies prices up 26%?
Many are now likening this to "2007/08 all over again", suggesting that this is only the first 26%, there's a further 74% still to come yet. Are they right? The main similarity that I can see with then is that that particular rally had precious little to do with demand either. It was largely speculative led, and we all know what happened to that enormous house of cards.
A big difference between then and now is that global wheat stock levels are much higher. Up by more than a third from 73 days worth of supply to 102 days now, based on the USDA's latest missive. And in case you've forgotten we've got more than 5 MMT of barley sitting in European intervention stores still waiting to find a home.
So where do we go from here? We don't really know the answer to that one. As with 2007/08, that depends on whether - and for how long - investment money continues to pour into the grains sector looking to make a fast buck. One thing is for sure, they will all be stampeding for the exits again when the music stops, try and make sure it's not you left holding the baby.
Remember too that the harvest is upon us, and what happens soon after that? That's right planting time. What will the world's farmers do I wonder if wheat is still GBP130/EUR175/USD6 (or even higher) when that comes around? That's one that we do know the answer to. Rearrange the following words: LOADS PLANT SH!T OF IT (AGAIN) ABSOLUTELY. REGRET ONLY TO IT SUBSEQUENTLY COLLAPSES MARKET WHEN (AGAIN).
Wheat: Second Guessing The USDA
US spring wheat ratings good/excellent fell one point from last week to 83%, but are still amongst the best since 1990, according to the USDA last night. The crop is slightly behind normal development at 52% headed, compared to 57% normally. Winter wheat harvesting is past hallway done at 54%, which is in line with normal. Harvesting in the top producing state of Kansas is now 84% complete. Good/excellent winter wheat fell one point to 63%.
Overall the US wheat crop is clearly looking in great shape. Last Friday, Informa pegged the all wheat yield at a record 45.9 bu/acre, fully two bushels ahead of the USDA. They also had 2010 US wheat production at 2.217 billion bushels, which is 150 million higher than the USDA, and now slightly ahead of last year despite the sharp acreage drop.
That sets the stage for the USDA to raise their US production estimates on Friday. They should also increase their ending stocks based on last week's numbers showing wheat stocks as of June 1 at 973 million bushels, which was 33 million bushel above the average trade estimate.
So, from a US wheat perspective, Friday's USDA report should be bearish. Although balancing the books is a pretty popular pastime in Washington, so don't go getting too surprised if they don't raise their domestic usage estimates also to compensate for last week's surprisingly low corn supplies. That might absorb some, if not most, of this extra US production.
The sixty million dollar question now seems to be what will they say for production elsewhere? In particular Russia, Kazakhstan, Europe, Canada and China. Certainly all but the last of those could see production estimates revised lower. Last month's numbers were 57.5 MMT, 17 MMT, 143 MMT, 24.5 MMT and 112 MMT respectively, you could easily make a case out for cutting at least 10 MMT off that little lot, but the USDA are famously slow at reacting to rapidly changing crop production prospects. It may well be that the Russian crop is only 50 MMT this year, but if it is the chances of the USDA reporting it at that on Friday are remote.
So even before the numbers are out, I'm already doubting their credibility, yet the market will react to the USDA's perception of things just like it always does. We might as well place bets on a couple of raindrops sliding down the window pane. Given the magnitude of the recent rises in European prices over the past week, booking a few profits ahead of Friday might be a good idea.
Protein Wheat Differentials Widening By The Day
Demand for higher protein hard wheats continue to widen the differentials between Kansas City and Minneapolis wheat contracts compared with Chicago.
At the beginning of the year front month CBOT wheat was trading at a 7 cent premium to Kansas City wheat and a discount of just 3 cents to Minneapolis wheat.
Based on last night's closes Kansas City wheat is now running at a premium of more than 30 cents over CBOT, with Minneapolis commanding a premium of more than 75 cents.
A return to warm and dry weather in the Southern Plains should see the wheat harvest resume in northern Oklahoma and push into southern Kansas this weekend. Texas and Oklahoma yields have been good but protein levels have been a bit disappointing, what lies ahead in Kansas? With stripe rust having been a real problem in the largest wheat state in the US, it's possible that both yields and proteins will disappoint.
And then of course there's Canada...
Wheat: Taking China Out Of The Equation
In 2008 global wheat supplies fell to a dramatic low sparking food rioting and the sharp spike in prices that we all remember so well. World supplies fell to below 2 1/2 months worth of consumption, and the ensuing panic pushed global prices to unprecedented highs.
Things have sure changed a lot since then, suddenly we are awash with wheat that nobody wants, we can hardly give the stuff away. World supplies have risen to a much more comfortable nigh on four months worth of demand, and global prices have fallen back accordingly.
Phew, what a relief that was then eh? We can all put our feet up and relax, the world isn't going to run out of wheat after all.
Just before I put the kids to bed to nod off in comfortable bliss, safe in the knowledge that Mrs N#3 isn't going to have to queue all night outside Tesco's to ensure we have a generous supply of extra thick sliced Warburtons for our breakkie in the morning. Where is all this wheat, I mean it is all there isn't it? We can get our hands on it, if we want it like? Just for our peace of mind.
We aren't doing anything daft like turning it all into biofuel because we think that we have so much of the blinking stuff, only to turn around and find that when push comes to shove and Mother Nature chucks us a googlie that toast is surprisingly indefinitely off then menu?
Just double check those numbers again for me will you old chap?
Right, look, here's the numbers. We'll use the USDA, they're pretty reliable aren't they?:
World Consumption(MMT) World Stocks(MMT) Stocks/Usage %
2006/07 615.77 130.64 21.22
2007/08 617.46 124.41 20.15
2008/09 642.52 165.05 25.69
2009/10 652.18 192.90 29.58
2010/11 667.49 193.93 29.05
There you go, little wobble around 2007/08, normal service resumed, job sorted night night sleep tight. Look if you're still worried I'll leave the landing light on, how's that?
What? You want me to take China out of the equation, just to put your mind at rest? Bloody hell, right here goes then, and don't ask me to do anything else, it's way past your bedtime now.
Chinese consumption has been very flat during this period at around 105 MMT, according to the USDA. China's share of world stocks however, has risen from 38.45 MMT in 2006/07 to a projected 62.89 MMT in 2010/11.
So although Chinese consumption is static, rest of the world consumption has grown steadily from 513.77 MMT in 2006/07 to a projected 562.69 MMT in 2010/11.
That means that world stocks to usage excluding China in 2010/11 is set to come in at 23.29%, or around 2 3/4 months supply. OK, that's tightish, but stop crying will you it's not that bad, we're not going back to the dark old worrisome days of 2007/08 here my lad.
What? I can't tell what you're saying why you cry like that, calm down lad, what is it? You've read on the Blog that world wheat production in 2010/11 might be significantly lower than what the USDA reckon? Surely not.
Right listen, I will do the sums one more time just to put your mind at rest. If we assume that the USDA are wrong, an absurd notion I know, but lets just assume it for now. They do still have Canada down to produce 24.5 MMT of wheat this year after all.
If Nogger's projections are correct and the world will only produce 646.9 MMT of wheat in 2010/11, where does that leave us? Well, even allowing for the fact that 4 MMT of the USDA's potential overstate is in China itself, that cuts the rest of the world stocks to usage to 20.16%.
Yikes! That's right back to where we were in 2007/08. Get your dressing gown on son, we're off to Tesco's....
The Global Wheat Situation
Chicago wheat set contract lows yesterday, as it frequently does at this time of year with the harvest just getting underway. By the time it reaches Kansas in a few weeks time we will have a clearer picture of how good, of bad, yields are likely to be this year.
The unusually cold and wet spring has led to significant problems with stripe rust this year, a disease that lowers yields and quality of wheat. The Kansas Wheat Quality Council's crop tour of wheat fields in early May suggested that yields in the top-producing US state may disappoint.
If reports of subsequent widespread stripe rust are accurate, then we may see final Kansas yields average below 40 bu/acre (from 42bu/acre in 2009).
Spring wheat planting is underway in Kazakhstan under very dry conditions, yields could also be a problem there this year.
Russian wheat has only suffered very low levels of winterkill in the past couple of seasons, but losses this year are estimated to be around 12%, potentially cutting their wheat crop to around 53 MMT from 61.7 MMT in 2009.
Have rains arrived just in time to save wheat in Northern France, Europe's largest producer? We'll know before too long. Winter wheat in the UK looks a whole lot better than it did a few weeks ago, although it's too early to put an accurate prediction on yields just yet.
Whilst April and May were cooler and much drier than normal in western Europe, its been tipping it down in Poland, Czechoslovakia, Romania, Hungary etc. That may lead to some quality issues. Lack of finance may also end up having a negative impact on output here.
That could also be an issue for many growers in Ukraine this season, where winterkill rates were also higher than in recent years.
Spain and Portugal enjoyed a much wetter than normal winter which should give them a decent wheat crop. That also applies to Italy.
Chinese officials, bless their little lying cotton socks, are estimating a wheat crop broadly unchanged from last season despite a number of weather issues this season, with an unprecedented drought in the south, and cold in the north. Then again they are still saying that they had a corn crop of almost 164 MMT in 2009, so why would say anything different about this years wheat?
The harvest in India and Pakistan is at an end, with official estimates here showing a wheat crop similar to last season in India, and around 2 MMT down in Pakistan. The Indian government have wheat coming out of their ears they say, carryover stocks from last season are so large. In reality the quality of last season's wheat is so poor that it may well indeed have been stored in the Indian governments ears.
Whilst we have harvest time just around the corner, planting is only just beginning in the southern hemisphere.
Argy farmers are likely to finish wheat planting by the end of the month, they are around 15% done at the moment. Production is expected to be significantly higher than last seasons measly 7.5 MMT, although estimates vary quite widely at the moment.
Planting is also underway in Australia. Conditions in the east are said to be largely favourable, although there have been problems with dryness in Western Australia, the nation's largest producing state. Output overall is seen holding steady around 22 MMT.
Wheat Déjà Vu?
Traders on both sides of the Atlantic seem at a loss to explain the sudden strength that appears to come out of nowhere for wheat.
Is it simply a "spring rally" blip against a background of huge global stocks that every bear in the marketplace keeps harking on about? Or is it a case of all the bearish news is already out there?
It's interesting to note that in 2009 the wheat market declined fairly steadily from January through to mid April (albeit starting from substantially higher levels than where we are now), before putting in a sharp rally that lasted six weeks from mid-April through to the end of May/first week in June. Nov10 London wheat peaked at GBP134/tonne then.
After that the markets went into free-fall, with Nov10 London wheat hitting a harvest low of GBP105.25 in mid-September 2009, before rebounding and then ultimately setting the recent and lifetime contract low of GBP100/tonne on 12th March 2010.
So here we stand today with Nov10 at GBP106.25/tonne as I type, having managed to regain a bit of strength this past month despite a better showing from the pound against both the euro and US dollar.
What can we attribute those gains to? Lack of farmer selling certainly is a factor, whether by design or simply because they are too busy with fieldwork now that spring has finally arrived.
Perhaps of greater significance to my mind is the sheer volume of speculative shorts in wheat. They've been talking the market down for so long, for two years in some cases, that the recent mini-rally has got a few spooked it seems.
European wheat finally got itself into a situation where it could compete on a truly global export stage with the recent highly publicised sales to South America and Asia. That coincided with supplies drying up in places like Ukraine, after six months of extremely aggressive marketing.
So where do we go from here? Are we in for another 2009 style rally through until the end of May? And what happened to spark that rally, and bring it to an end, last year?
There was a severe killing frost at the end of the first week in April 2009 that took out large areas of winter wheat in Oklahoma in particular, and an ongoing drought in Texas also cut wheat production there. US spring wheat plantings were badly delayed by floods of epic proportions last May. Egypt also had it's spat with Russia over wheat quality issues, and there was talk of drought damaging wheat output in Eastern Europe and the CIS.
May is often a pivotal month, as most US spring wheat planting is normally done by the end of then. Farmers have also been actively sowing in Canada, Australia and Argentina. The Indian harvest has been wrapped up, and is underway in China, the two largest producers of wheat in the world.
By June the combines are starting to roll in parts of Southern and Eastern Europe, and on the large US winter wheat fields of Kansas and Oklahoma. Ukraine has had it's giro in and is planning to get drunk on export(s). Cash-starved Romania, Hungary etc simply can't wait to get stuck in either, and so it all starts again.
Even if yields are lower this year and the hard winter has taken it's toll across Europe and the FSU, by June the hungry will have been fed, and the needy will be exporting anything that isn't nailed to the floor. That sounds like prices will go lower again this summer no matter what to me.
Having said that, if you fancy a long term punt, the "Sold Out" signs might be getting hung up in the windows of Ukraine and the likes even earlier in 2010/11. That could make the 2011 "spring rally" quite interesting, and those that have held off selling that long might find that they have a few willing suitors all of a sudden.
There you go, not only what is wheat going to do for the rest of 2010 but I'll even throw in the first quarter of 2011 for free, missus:
World Wheat Production Down But Stocks Up
The International Grains Council (IGC) said today that world wheat production for 2010/11 will fall by 17 MMT, or 2.5%, to 658 MMT. Although consumption is seen rising by 9 MMT to 654 MMT in 2010/11, ending stocks for 2010/11 are seen slightly higher than in the current marketing year. Closing stocks for 2009/10 were reduced by 1 MMT from last month to 196 MMT, carryout at the end of 2010/11 is seen at a nine year high of 199 MMT. The increase, despite lower production and higher usage, is due to the 30 MMT increase in opening stocks left over from bumper production in 2008/09.
Corn stocks on the other hand are seen falling, despite higher output in 2010/11. Production in the year ahead will rise by 6 MMT to 809 MMT, but a 13 MMT pick up in consumption sees ending stocks next season decline from 148 MMt to 140 MMT.
