Grain Market Review: Wheat

by Chris Lyddon
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Wheat
Global market is well supplied, keeping prices firm.
Photo by Adobe Stock. 
 
Wheat has had a firm start to the year, with currency movements, concerns over winterkill and bullish news on plantings helping to provide some impetus. However, the moves were limited amid seasonally thin trade. The global market still looks well supplied.

“After initially edging lower in early December, a more bullish tone later persisted in world wheat export markets, with the IGC GOI sub-Index up by a net 5% since the last Market Report,” the International Grains Council (IGC) said in its Grain Market Report for January. “Mild underpinning stemmed from occasional concerns about cold, dry conditions in parts of North America and Europe, as well as confirmation of a sharp drop in U.S. winter acreage.”

Gains were also tied to annual index fund rebalancing during January, which led to additional wheat futures being included in commodity portfolios, it said.

“Trading activity in Black Sea markets was seasonally thin,” the IGC said. “Underpinned by strong buying interest from India (for Ukrainian origin supplies) and logistical constraints, milling wheat (12.5% protein) export quotations firmed moderately, to around $185 fob. E.U. values were broadly unchanged until early January, when U.S. dollar denominated quotations turned slightly higher on currency movements, with some support too from gains in the U.S. and more reluctant producer selling. Solid demand also lifted German B quality (12% protein) wheat, which increased by a net $7, to $192 fob (Hamburg).”

U.S. export prices were firmer, with some upside recently linked to a weaker dollar, according to the report.

“Amid comparatively tighter supplies, gains in high quality spring wheat quotations were the most pronounced, with DNS (14% protein) up by $25, to $273 fob (PNW),” the IGC said. “A sharp drop in acreage and declines in state winter crop condition ratings contributed to a net $15 gain in HRW (11.5% protein) values, now priced at around $207 fob (Gulf). Up River quotations in Argentina (12% protein) were overall little-changed at $175 fob, as limited producer selling offset earlier harvest pressure. A large crop was mildly bearish for fob prices in Australia, especially for lower grade milling supplies.”

In its Agri-Commodities Monthly report, Rabobank said that the constructive outlook for global wheat markets is maintained “as acreage cuts and winter condition concerns limit price moves to the downside.”

“However, expect upside price movement to be slow, as recordlarge global supplies buffer against bullish headlines,” Rabobank said.

Wheat
Source: U.S. Department of Agriculture
 
Rabobank pointed out that the USDA has put U.S. winter wheat area at the lowest level since 1909, and down 10% on the year as U.S. producers have responded to three years of low prices. On the basis of that figure and year-on-year spring area data, Rabobank forecast an overall fall of 7% in U.S. wheat area. For the E.U., it predicted a 1% cut in wheat area that would bring stocks up to 12 million tonnes, a rise of 1 million, assuming trend yields.

“High expectations for 2016-17 Russian exports have become more doubtful after a record 72-million-tonne harvest,” Rabobank said. “Exports were initially forecast at a record 32 million tonnes, amid expectations of aggressive tenders, competitive global pricing and the threat of building inventories. However, this has not been the case, with marketing year exports to November up just 4.5% year-on-year, vs. USDA’s predicted 13.5% increase for the year. This poor seasonal uptake follows ruble appreciation — having rallied 11.6% versus the dollar over the period — and a lack of grower selling in light of poor interior prices.

“We see two outcomes to this development: first, future exports will thicken in pace as global quality wheat becomes scarcer through spring. Second, global competition will continue to constrain exports and build domestic stocks. Given historical seasonality and such a well-supplied global market, our view leans more to the second outcome, leading us to revise Russian 2016-17 exports to 28 million tonnes and ending stocks to more than 13 million tonnes, a six-year high if realized.”

Rabobank also reported freezing temperatures and questionable snow cover driving concerns over winterkill in the European Union, the United States and the Black Sea.

“However, aside from a few anomalies, weather conditions have been largely seasonal and are unlikely to have damaged crops beyond the point of recovery during spring,” Rabobank said. “A quantitative assessment of winter damage can only be made once the crop breaks dormancy – a key price factor in the coming months.”
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