As evidenced by recent market activity (the collapse following early May’s surge due to freeze damage in the Plains) the US wheat balance sheet is no longer priority number one with respect to discovering price. Rather, it’s the sum of major world exporter supply & demand, and as such AgResource’s work suggests downside risk is limited into late 2017. The graphic at left displays updated vegetation health compared to last year in Europe, Ukraine and Southern Russia. No dire issues are noted, but weather since late winter has been far from ideal. Highlighted are the problem areas, including Spain, pockets of France & Germany of much of Ukraine’s winter wheat belt. Already the USDA projects major wheat exporters stocks/use to contract in 17/18, a forecast that’s becoming more valid amid the current growing conditions.
It’s premature to adjust EU/Black Sea wheat yield from trend, but crop size is unlikely rising. Our climate scientist suggests a real risk of hot/dry weather in Central Europe and parts of Russia beginning in June. Recall that wheat crops are made in Europe in June and the first half of July.
The USDA’s combined EU & Russia wheat balance sheet is attached and a test of record yields is unlikely. Even assuming a modest decline in total consumption (via cheap world corn prices), EU/Russian stocks/use falls to the lowest level in years. The major exporter wheat balance sheet is a factor in determining world cash wheat prices. Total EU/Russian supplies will be very little changed from 2016 as a possible 10% rebound in EU production is offset by a reduced crop in Russia. Current cash wheat prices reflect this fact.
AgResource has found a strong correlation between Russian wheat end stocks as a percent of domestic use and cash prices there, which in turn drive world wheat prices elsewhere. Assuming the USDA’s May forecast, our model indicates that domestic Russian prices in the Caucasus region (from where exports are sourced) will find a seasonal bottom at $180/MT, or likely in a range of $170-180. As such, world fob prices are not expected to trade below $170/MT for any length of time this summer, and so US wheat will stay rather competitive in a range of $4.10-4.70 basis spot KC futures.
And longer term, cash prices in Russia are down 10-18% from last year in ruble terms, EU wheat futures are unchanged and no longer is there an incentive to expand seeded acres for 2018. Barring perfect weather, it’s likely that world exporter wheat stocks have posted a multi-year peak in in 2016/17 and that a major bottom is starting to be forged.
