Wheat

by Chris Lyddon
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Wheat has started 2014 with a bearish tone, set by supply and demand. Weather and logistical problems have provided some support.

“The 2013-14 marketing season has been characterized by record global grain production and therefore downward pressure on prices,” the U.K.’s Home Grown Cereals Authority said in a report on the milling wheat market. “In response, demand has been re-stimulated and has prevented a complete collapse in price. Relatively tight stock-to-use ratios worldwide have also helped to prevent a price collapse.”

After a number of seasons mostly following volatility in the maize market, wheat has become more interesting in its own right, the report said.

“Strong import demand from China and Brazil has helped to reduce U.S. stock levels – the global safety net of exportable wheat stock,” it said. “By Feb. 6, the U.S. had exported/sold 27.3 million tonnes of wheat, up 26% from the same point in 2012-13 and 20% in 2011-12.”

However, this season’s Canadian crop is more than 10 million tonnes up on the previous year, at 37.5 million tonnes with the USDA estimating a 4.79-million-tonne increase in closing stocks to 9.84 million tonnes, it said. This is enough to offset the 4.35-million-tonne decline in U.S. stock estimates to 15.19 million tonnes, although internal Canadian logistics may impact the country’s export capabilities.

In its most recent Grain Market Report (GMR), the International Grains Council (IGC) also highlighted the bearish factors.

“World wheat export markets had a mostly bearish tone since the last GMR, pressured by heavy global supplies, with prices falling particularly steeply during December,” the IGC said. “While strong export demand and worries about harsh winter weather in the U.S. provided some underpinning recently, values continued to trend lower and the IGC GOI wheat sub-Index weakened by 8%, to its lowest level in around three-and-a-half years.

In the U.S., futures generally fell in the past two months, weighed by sluggish export demand amid a well-supplied international market, the report said.

“While 2014 crop prospects were still seen as mostly favorable, there was occasional support from adversely cold conditions for winter wheat, especially in January, while worries also mounted about overly dry weather in the southern Plains,” the IGC said.

“Although export prices slipped to competitive levels, tight transportation was seen to be hampering any acceleration in shipments, often keeping exporters absent from international tenders. Difficult logistics also contributed to tightening domestic supply pipelines, particularly for premium milling wheat, only partly eased by cross-border movement from Canada.”

Tight logistics propelled U.S. export basis levels higher, especially for spring wheat from PNW during January, with DNS (14%) premiums almost doubling since the last report, the IGC said.

“This more than offset a retreat in futures and export quotations posted an overall 33 gain, to $359 fob (PNW),” the report said. “Despite some mild underpinning from adverse weather, SRW export values fell by $33 over the same period, to $252 fob (Gulf), while HRW dropped by $38, to $281 fob (Gulf).”

Activity in the Black Sea region was seasonally slow, but tightening good quality supplies and government intervention buying saw an initial rise in values, the IGC said.

“Prices retreated more recently, pressured by declines in other exporters, with falls in U.S. dollar-denominated export quotations accentuated by weaker local currencies. Nominal milling wheat quotations fell by $5, to $281 fob.”

David Sheppard, managing director of U.K. trader Gleadell, noted in a report on the market that lower than expected U.S. wheat and maize stocks figures released in mid-February had caused a spike in markets “as nervous shorts moved to cover some of their exposure.”

“Delving into the report, it still showed more than adequate inventories of wheat and coarse grains,” he said. “The drop in U.S. stocks was mainly due to an aggressive outlook by the USDA regarding future U.S. exports, based on strong sales and export commitments. However, with signs of increased export availability from the Black Sea region and Canada (easing logistics), and lower imports seen for Brazil, the U.S. market may have to drift lower to match this optimism.”

He also explained that E.U. markets had been supposed by U.S. data. “Exports continue to impress with export certificates for wheat as of Feb. 7 reported at 18.193 million tonnes, sharply up from 11.678 million tonnes a year ago,” he said. “The pace of French exports may start to slow in the coming weeks due to increased competition and tighter Egyptian specification.”

The U.K. market had fallen “as a bullish report from the Bank of England on U.K. economy/growth resulted in strong gains for sterling against both the U.S. dollar and the euro, pushing prices lower,” he said.

“The surprise ‘surge’ in wheat imports during December, and data showing domestic wheat usage starting to decline, increases the likelihood of higher stocks at the end of the season, although some are starting to question whether the crop was there in the first place, given the inclement conditions.”

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