CBOT wheat futures have rallied after global and US wheat stocks were lowered in the February USDA Report.
Extra fuel was added to the rally as speculative funds began to buy back large net sold positions.
March futures are at their highest levels since August, close to 60 US¢/bu above the lows set on December 23 last year. In $A terms, the market is up $12.47 per tonne. The Australian dollar has risen 4.7 US¢ since Christmas, pulling back gains fed into our market. Despite the lift in the $A value of CBOT futures, our cash market has struggled to post gains on the pre-Christmas market.
A couple of port zones are up modestly, but in many cases benchmark APW cash prices are within one or two dollars of the price levels seen just before Christmas.
The trigger for the reduction in stock levels in the latest USDA Report was a stronger pace of US exports. US wheat export projections were raised by 1.36 million tonne, with a net 1.28 mill t coming off projected ending stocks for this year.
This is a significant move. Any sustained recovery in US wheat futures will only occur if Australia begins to eat into US wheat stock levels, and this latest report seems to be saying this could be under way. Elsewhere, production estimates were reduced, particularly in India. A 3 mill t drop in Indian production estimates fed directly into Indian and global ending stock estimates. Global stock estimates were lowered 4.68 mill t. While this is important, it is a drop in US wheat stocks estimates that is going to drive a lift in US wheat futures and the base for global prices.
There’s still a 7.84 mill t lift in global wheat stocks year on year, and a lift of 4.46 mill t in the US. These ongoing high stock levels will keep any short term rally in check.
The market will focus more and more on the 2017 northern hemisphere season. A projected 17 mill t drop in production is likely to deliver the first drop in global wheat stocks since 2013-14. Any weather issues in the next few weeks should generate additional risk premiums in the futures market. What the commentators will still see, though, is that global, and US stocks, will remain historically high even with such a drop in production.
Again, it will come down to how much residual demand for wheat in global markets gets pushed back to the US. It may actually be more than expected. Stocks outside of the US and China are down 10.66 mill t this year. A drop in non-Chinese wheat production will put more pressure on that number. Growth in US stocks are also likely to stall with a smaller US crop.
If more demand is pushed back to the US as stocks outside of China and the US pull back to levels last seen in 2008-09, there will be higher wheat prices for Australia’s 2017 harvest.