The USDA released its monthly World Agriculture Supply and Demand Estimates last week, and wheat futures plunged 19 US¢/bu.
From the July high of 474.5 US¢/bu, September wheat futures have now fallen 140 US¢/bu, or close to A$80/t, in a little over a month.
Wheat futures prices are now much lower than anyone expected, and having broken major price support on the charts, are not showing any signs of immediate recovery.
So, what’s changed? Why has the market gone against everyone’s expectations? One word: Russia. Last year, Russia produced a record crop of about 72.5 million tonne, pushing ending stocks up by close to 5 mill t. The chances of them repeating that crop were seen as small on the assumption yields would return to normal.
Russia should have been contributing to the decline in global wheat production, and a major driver of the decline in stocks outside of China and the US. Not to be.
Against everyone’s expectations, the USDA lifted their production estimate by a massive 5.5 mill t in one hit. This year’s crop now stands at 77.5 mill t, up 3 mill t on last year’s record. Accompanying this lift in production is a further 4.5 mill t lift in ending stock estimates.
Russian exports will lift 3.7 mill t this year, and it will still end the year with more wheat stocks. This is a game changer, one the market has recognised. Russia has been a major component of every sustained price rally, or collapse, since 2007. That is going to be the case again this year. This was always the problem with the midyear price spike this year. It was driven largely by the US, with some support from Canada and Australia, but there was no support from Russia at all.
That was always a danger sign, but no-one projected such a massive one-off lift in production estimates that would be large enough to change the whole dynamic of the wheat market. We now face the prospect of cheap Russian wheat being on offer for some time.
The other market movers from the USDA report centred on US corn, soybean and wheat production estimates for the US itself. In each case production estimates have come in above expectation, confusing the market and adding to weakness.
Since the July report, global wheat stock estimates have lifted 3.58 mill t, and estimates outside of China and the US have lifted by 4.84 mill t. The year-on-year drop in stocks outside of China and the US are now only set to fall by 3.22 mill t. This is disappointing, and has trimmed at least $10 per tonne off end of year price expectations.
The year-on-year price move may be trimmed more if the sheer weight of Russian wheat stocks depresses prices and keeps US wheat out of global markets.
