Last week’s USDA Report seemed to be supportive for wheat, with the market rallying 20 USc/bu in response, setting the market up to challenge the highs set in late May. However, the rally did not last, with prices then falling by 33 USc/bu, or $A12.69 a tonne, over the next two trading sessions. Further small losses were recorded on Friday night to close the week just under 500 USc/bu, down from the May high of 554 USc/bu.
In general terms the USDA Report appeared to be neutral for wheat with US supplies (stocks plus production) increasing a little, and global supplies falling a little. Probably the negative came from the US numbers which showed a lift to opening stocks (driven by lower exports for the marketing year just finished), and a lift in winter wheat production.
However, US exports for the new season were increased and this allowed a small revision down in expected US ending stocks.
Globally the numbers seem to be supportive with another reduction in the estimate for the Russian and German crops, pulling 3.07 million tonnes from the global crop, but reduced use for feed saw global stock estimates lift by 1.83mt.
Several factors combined to then cause the sharp reversal in prices. One is the normal seasonal pressure from the winter wheat harvest, even though the early harvest is in the main drought areas. In addition, we had a rising US dollar, the uncompetitiveness of US wheat at the recent higher price levels, and disruption to grain markets from US trade spats with China, Canada and Mexico.
The uncompetitiveness of US wheat had become quite significant, with some analysts indicating that it had pushed out to as much as $US40/t in late May. A part of the problem is that even though Russian production is being wound back, along with smaller reductions for the EU crop, Russian and EU prices are not lifting at this stage.
The underlying issue continues to be large global stocks, and importantly, large stocks in Russia which will allow them to maintain high levels of export despite the problem with this year’s crop. The same applies to the EU.
The trade issues seem to have had the biggest impact over the last week, with soybean and corn prices falling sharply, dragging wheat down with them. The soybean issue is linked to the US/China trade war, where import tariffs are about to be imposed on US soybeans by China. For corn the issue is more the trade friction between the US, and Canada and Mexico, as the North American Free Trade agreement comes under pressure.
When the higher US dollar was thrown into the mix, it became a bad week for all grains.
For wheat though, issues surrounding production remain. While parts of the Black Sea are getting rains, the dry areas remain dry, and in the case of Russia this is where a lot of export wheat is sourced from. The USDA reduced the Russian crop, but some would suggest that estimates for Ukraine and Kazakhstan are still under pressure.
ABARES has also reduced the estimate for our crop on the back of a lower acreage, as northern NSW winter cropping areas are wound back against the drought. At 21.9mt it is up on last year’s crop, but well under the 24mt being assumed by the USDA.
