Grain Market Roundtable

by Jay Sjerven
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Wheat futures prices held near contract lows, in instances, near multiyear lows, in the wake of predominantly bearish U.S. Department of Agriculture August production and supply-and-demand forecasts issued on Aug. 12. Market analysts interviewed by Milling & Baking News, sister publication of World Grain, could find few features capable of rallying wheat prices in the near term as the USDA raised its forecasts for both U.S. and world wheat production, and hiked its projections for U.S. and world 2014-15 wheat ending stocks.

The widest adjustment from the USDA’s July wheat outlook was the large increase expected in world wheat production. The department forecast world wheat production in 2014-15 at a record 716.09 million tonnes, up a whopping 10.92 million tonnes from the July projection and up 2.02 million tonnes from 714.07 million tonnes in 2013-14, the previous record.

The USDA raised its production forecasts for Russia by 6 million tonnes and for Ukraine by 1 million tonnes. Because of the larger supply, Russian 2014-15 wheat exports were forecast at 22.5 million tonnes, up 3 million tonnes from the July projection.

Significantly, the USDA also raised its estimate for China’s crop by 2 million tonnes, to a record 126 million tonnes. Because of the larger China crop, the department lowered its forecast for that nation’s wheat imports in the current year to 2 million tonnes compared with the July outlook at 3 million tonnes and 2013-14 wheat imports at 6.77 million tonnes.

World wheat consumption was forecast at a record 706.79 million, up 740,000 tonnes from 2013-14. World wheat ending stocks in 2014-15 were forecast at 192.96 million tonnes, up 3.42 million tonnes from the July outlook and up 9.3 million tonnes, or 5%, from 183.66 million tonnes in 2013-14.

The USDA also raised its forecast for U.S. wheat production. The 2014 U.S. wheat outturn was forecast at 2.030 billion bushels, up 38 million bushels from the July projection but down 100 million bushels, or 5%, from 2.130 billion bushels in 2013. The hike in the production forecast lifted the forecast for the U.S. wheat supply in 2014-15 to 2.779 million bushels, which still was down 8% from 3.016 billion bushels in 2013-14.

The USDA raised its forecast for feed and residual use of wheat in 2014-15 by 10 million bushels, to 155 million bushels. Feed usage in 2013-14 was 223 million bushels. The USDA raised its forecast for U.S. wheat exports to 925 million bushels from 900 million bushels as the July projection and compared with 1.176 billion bushels in 2013-14.

The U.S. carryover of wheat on June 1, 2015, was forecast at 663 million bushels, up 3 million bushels from the July projection and up 73 million bushels, or 12%, from 590 million bushels in 2014.

Asked what the major takeaways were from the USDA’s August reports, Steve Freed, vice-president, ADM Investor Services, Chicago, said, “First of all, the USDA confirmed that world wheat crops are getting bigger, especially in Russia and Ukraine. I also think with the larger China crop, there will be less demand from China. Here in the United States, I think most people think the USDA is overstating both feed and export demand. The final 2015 carryover may get larger.”

Paul Meyers, chief agricultural economist, Foresight Commodity Services, said the huge increase in the world wheat production forecast was the single most bearish feature in the report. Meyers recalled that the USDA in May, in its first supply-and-demand outlook for 2014-15, forecast world wheat production at 697 million tonnes, which would have been 17 million tonnes smaller than the record 2013-14 crop. Now, the world crop is forecast to be a record and 2 million tonnes larger than last year’s crop. That 7-million-tonne increase in forecast wheat production from the July report projected to take place in Russia and Ukraine, two major wheat exporters, indicated there will be a larger exportable supply worldwide, and even as the USDA raised its U.S. export forecast, it was clear U.S. wheat will face significant competition in world markets. “There has been a dramatic shift in world wheat supply expectations for 2014-15 that has been reflected in the market’s psychology,” Meyers observed.

Corn, soybeans to impact wheat

Meyers said the most important market mover for wheat in the next few months probably will be what happens to corn and soybean futures.

“Wheat fundamentals for 2014-15 are now much better known with the completion of the winter wheat harvests,” he said. “We’re still waiting to see how large the corn and soybean crops will be. Most think both of those crops will be larger than the USDA’s current forecasts (a record 14.032 billion bushels for corn and a record 3.816 billion bushels for soybeans), which should pull down corn and soybean futures prices, and wheat prices as well.”

Freed and Meyers saw little opportunity for the wheat market to rally significantly anytime soon.

Meyers said the Southern Hemisphere crops were an unknown, but there seemed to be no significant weather threat as yet. The Indian monsoon has not been as productive as usual, but there was time for this to change as well. He noted the USDA lowered its forecast for European Union wheat exports in 2014-15 by 3 million tonnes because of quality problems in the French and German crops. If the problems are more severe than currently thought, some additional demand may be shifted to the United States, which may provide a boost to prices, but that was not certain.

Tensions between Ukraine and Russia cannot be discounted as a market mover in the event conflict erupts and disrupts wheat exports from either or both of those countries. Freed pointed to a recent brief rally in prices that was attributed to ideas Russia may invade Ukraine. But the larger wheat production forecasts for those countries seemed to provide some offset to those concerns.

There were macro factors that may bear on wheat price direction such as slowing economic growth in China, financial woes in Argentina and blowback from European sanctions on Russia, but to date, these took backstage to the market’s supply-and-demand fundamentals, and these argued for continued market weakness, Freed noted.

Asked how bakers should respond, Meyers said, “I would increase coverage in the fourth quarter, extending contract balances a month or so. And every 10 to 15 cents decline in wheat futures prices, add another month of coverage. If we go 40 cents or so lower, I’d start buying January-March as well, at least January.”

Meyers suggested patience for April-June. He said the winter wheat crop was being planted under much better soil moisture conditions than a year ago, and there may be a strong rebound in hard red winter wheat production next summer.

Freed said current prices were good prices, and bakers should lock them in for the fourth quarter.

“And sometime in early 2015, they should probably extend their coverage if prices are at current levels or lower, just in case we have a weather problem next year,” he said.

“We hope logistics will be better this year than last, but as of now, there is no indication that they will be,” Freed noted. “We just don’t know. We have truck, rail and barge freight near record highs for this time of year, and that adds costs to buying flour that cannot be hedged. I wouldn’t be surprised to see a cash wheat basis more volatile than futures this year, and logistics continuing to add to the cost of flour.”

Analysts expect record corn crop to get bigger

Although the U.S. Department of Agriculture forecast the 2014 U.S. corn crop record large at 14.032 billion bushels and the average yield record high at 167.4 bushels an acre, analysts expect both numbers will increase as “big crops get bigger.” The averages of pre-report trade expectations were 14.239 billion bushels and 170 bushels an acre, respectively.

“They just look unbelievable,” said Stephen Nicholson, vice-president, food and agribusiness research and advisory at Rabo AgriFinance, St. Louis, Missouri, U.S., after recently looking at crops in several states across the heart of the Corn Belt. “There was nothing in the numbers that was too startling,” he said. “I thought the USDA might be more aggressive on yield.” He expects a final average yield of 174 bushels an acre, which could add another 500 million or so bushels to the 2014 crop.

Paul Meyers, vice-president of commodity analysis, Foresight Commodity Services, also said he wasn’t surprised at the USDA corn numbers.

“The USDA doesn’t do it all at once,” Meyers said, referring to the department’s initial forecasts that tend to be raised in later reports for big crops. He noted there had been five record high yields since 1990, with the August forecast 2 to 11 bushels an acre below the final estimate issued in January. He expects the final average yield to be 170 bushels an acre or higher for the 2014 crop.

“There’s plenty of corn around,” Meyers said, noting record high U.S. supplies projected for 2014-15 and a record global corn crop. “Prices will continue to work lower. The question is, how low is low on prices.”

Both analysts expressed concern about the impact of logistics, especially rail in the Upper Midwest, after last winter’s shipping debacle. Nicholson noted that users will not be reaching beyond their traditional buying areas because of the large crop. The biggest impact will be on country basis levels in “fringe” areas, with reports of flat prices already in the $2.50 to $3-a-bushel range in some areas. Farmers have continued to build bins and will store as much corn as they can because of low prices this fall.

While much of the focus has been on the supply side due to expected record production, demand is another issue. The USDA in the Aug. 12 WASDE projected total corn use in 2014-15 at 13.435 billion bushels, up 100 million bushels from the July projection but down 165 million bushels from 2013-14. Although projected feed use in 2014-15 at 5.250 billion bushels was up 75 million bushels from 2013-14, use of corn for ethanol at 5.075 billion bushels was down 45 million bushels and exports at 1.725 billion bushels were down 195 million bushels. With total supply projected at 15.243 million bushels, up 107 million bushels from July and up 462 million bushels from 2013-14, carryover on Sept. 1, 2015, was projected at 1.808 million bushels, up 7 million bushels from July and up 627 million bushels, or 53%, from the prior year.

Meyers said he expects a carryover near 2 billion bushels “by the time it’s all done” based on higher production partially offset by higher ethanol use than the USDA projects.

Ethanol plants, livestock feeders and food processors “are the winners” in this year of record corn production and lower prices, Nicholson said.

Jay Sjerven is senior editor, markets for Milling & Baking News, sister publication of World Grain. He can be reached at