by Bob Bailey, DTN Basis ans Feedstuffs Analyst
There has been a lot of discussion this past week about corn and soybean demand or lack thereof, and with most issues covered in that regard, I thought it would be a good time to take a look at the wheat markets and see if anything has or is going to change following the latest crop report.
The USDA crop report issued Nov. 9 showed U.S. wheat ending stocks lower than the October estimate by 9 million bushels. World ending stocks were slightly higher than the October estimate by 1.2 million metric tons.
According to USDA, U.S. wheat supplies for 2011/12 were lowered 9 million bushels based on updated production estimates for the states resurveyed following the Sept. 30 Small Grains report. Adjustments to production in these states, where significant acreage remained unharvested in early September, lowered production estimates for hard red spring (HRS) wheat and durum with an increase in white wheat production partly offsetting that.
Projected use for 2011/12 is unchanged for all wheat; however, domestic food use is projected higher for hard red winter (HRW) wheat and lower for HRS wheat. Projected exports are raised for HRS and lowered for HRW. All wheat ending stocks are lowered 9 million bushels, in line with the production change.
Global wheat supplies for 2011/12 are projected 2.6 million tons higher, mostly reflecting higher production in Kazakhstan and the EU-27. Kazakhstan production is raised 2.0 million tons and EU-27 production is raised 1.2 million tons. Partly offsetting these increases is a 0.5-million-ton reduction for Argentina and 0.3-million-ton reductions for both Algeria and Ethiopia.
World wheat trade is raised for 2011/12 with higher expected imports for China, a number of African countries, including Morocco and Algeria, as well as for Brazil and several FSU-12 countries neighboring Kazakhstan. Partly offsetting is a reduction in projected imports for South Korea where more corn feeding is expected. Exports are raised 1.0 million tons each for EU-27 and Russia, reflecting larger supplies in EU-27 and the continued heavy pace of shipments from Russia. Global wheat consumption for 2011/12 is raised 2.4 million tons with increased feeding expected for Kazakhstan, Brazil and Serbia. Larger crops in Kazakhstan and Serbia support more wheat feeding. Recent rains in southern Brazil have reduced wheat quality in some areas raising the potential for more feeding. Higher consumption is also expected for EU-27, Ethiopia, Kenya and several smaller FSU-12 countries. Global ending stocks are projected 0.2 million tons higher. Rising stocks in Kazakhstan, China and Morocco are partly offset by reductions in major exporting countries including Russia, Argentina and EU-27.
So what does all this mumbo jumbo mean to the average wheat farmer? Well, it tells him that U.S. wheat production is lower due to losses in spring wheat and durum. It also tells him that even though overall wheat demand is unchanged, there will be some demand changes in the different classes of wheat. As far as the global wheat situation, it basically tells the farmer that world production is higher despite a drop off in U.S. production. It also indicates that global consumption for 2011/12 is going to increase and will be covered by countries other than the U.S.
Anyone following the wheat market knows that there was large production in the Black Sea region as well as in Russia this year, and after being absent from the world market for the previous year due to drought, they have returned with a vengeance. Offering prices from this area have been less expensive than other export points and have drawn several importing countries to the market. What this has done for U.S. wheat is to basically shut it out of the market. Much of the demand in the world comes from areas closer, freightwise, to the Black Sea region than the U.S., which is also a big advantage for them. In the Asian markets, the U.S. should have an advantage as we can export from the West Coast at lower freight rates than the Gulf, but Australian production has found its way into the Asian markets by being able to undercut U.S. prices. So basically, the U.S. is losing business on two fronts.
It comes down to this: U.S. wheat is overpriced compared to the rest of the world, and unless we can reduce offering prices enough to compete with other export origins, we are not going to get anything done. USDA has lowered wheat export projections for the current crop year, and so far, the U.S. is on pace to meet that goal. I can’t say that it will be an accomplishment if the goal is met, as lowering the projections to easily meet a goal isn’t proving anything.
Looking at basis charts for the three largest classes of wheat — soft red winter wheat, hard red winter wheat and hard red spring wheat — it is easy to see that basis levels are at or higher than the five-year average basis. While wheat production has fallen in recent years, demand for the most part has held steady and even grown in some instances. As a result, basis levels moved higher as end users compete for available bushels. It’s like two different markets for the same commodity. On one hand, we have the domestic market that is dealing with tight stocks and firm demand, and on the other hand there is the export market where there is an abundance of stocks and U.S. offering prices and/or basis levels are well above the rest of the world.
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Posted with DTN Permission by Haylie Shipp