The October USDA Supply and Demand Reports continued to tighten the screws on global wheat supplies. However, this was not the case for the US where production was increased, domestic use reduced, and ending stocks increased.
Overall the changes to US numbers were not too dramatic, and the USDA did not change their estimates for US exports, despite the current slow start to the marketing year. However, it did provide for some weakness in CBOT futures coming out of the report.
On the global front supplies have continued to tighten. As expected the Australian crop was downgraded by 1.5 million tonnes to 18.5mt. Many in Australia would say that this is still too high, although recent rains in NSW and WA may allow some crops to finish better than would have been the case without those mid-spring rains.
The USDA also lowered its estimate for Russian production by 1mt after increasing it in September. The reality is that the Russian spring wheat crop is yielding less than expected, which is probably a function of the late planting, and now the rain disrupted harvest.
Global production estimates were reduced by 2.08mt from the September numbers. Consumption is down 460,000t, to leave ending stock estimates down 1.11mt after accounting for a 490,000t lift in global opening stocks.
On the trade front, the USDA has lowered total imports/exports, largely reflecting a drop in exports from Australia, and slightly lower imports by countries like Bangladesh and Nigeria.
So, once again, we go into a holding pattern to see if US exports will finally get the kick start that we are all waiting for. On this front there remains good news, with key indicators suggesting that eventually importers will have to turn to the US for their wheat supplies. This is probably why the USDA has continued to keep its US export projections unchanged.
A key metric for potential demand for US wheat is the state of wheat stocks outside of China and the US. The projections for this year have always been for a significant tightening, and the October numbers have taken another 1.89mt off this measure of stocks.
We are now looking at a 20.1mt year on year drop in wheat stocks outside of China and the US, with stocks hitting 96.35mt for a stocks to use ratio of 16.14 per cent. This is a multiyear low for the stocks to use ratio going back to well before 2003/04. Eventually this will see risk premiums being built into wheat futures prices until it becomes clear that global production will lift enough to reverse the trend.
Other news is also indicating that Russian wheat exports are slowing. Prices for Russian wheat are on the rise (some reports are suggesting a gain of $US11/t over the past three weeks), and market analysts have begun to lift export projections for EU wheat on the assumption that there will be a gap in supply to fill.
Unless US wheat prices rally too soon, US wheat will also continue to become more competitive, opening up the chance that the pace of US exports will improve, allowing wheat futures to also lift.
