The USDA released its monthly crop production and World Agricultural Supply and Demand Estimates (WASDE) reports last week, which provided mixed messages for the wheat market.
The U.S. crop production report increased winter wheat output by 1.3 per cent from the May estimate. This was viewed by the markets as bearish for wheat futures, especially Kansas City contract.
Conversely, the USDA WASDE report indicated that global wheat production is declining due to production issues in Europe and the Black Sea region. The WASDE report should provide some long-term fundamental support for wheat markets.
Wheat production in the U.S. increased from last month due to generally favourable growing conditions in the southern Plains. The main driver in the increase in winter wheat production was in the HRW wheat class. That crop increased by 21 million bushels from the May report to reach 726 million bushels. This is significantly larger than the 601 million bushels produced last year.
The other U.S. winter wheat classes saw only minor changes from the May estimates with SRW production forecast at 343 million bushels. This is down 107 million bushels from last year’s output.
Soft white wheat, which is mostly grown in the Pacific Northwest (PNW), was estimated at 208.6 million bushels. White wheat production in the PNW is up by 25.1 million bushels from last year.
The differences in production prospects in winter wheat growing regions are reflected in current spreads between Chicago and Kansas City futures. Increased production is pressuring Kansas City futures, while Chicago futures are supported by lower SRW output. This has reduced the spread to less than 10 US cents per bushel, which is historically low.
Even though spring wheat crops are just planted, market expectations for a large crop on both sides of the border are moving future spreads as well.
The September contract spreads between Minneapolis and Kansas City futures have also narrowed in the past month and are currently trading below 30 US cents per bushel. The July USDA report will release the first estimate of spring wheat production next month.
The global wheat picture in the WASDE report was in sharp contrast to the bearish outlook presented in the USDA Crop Production report. Global wheat production was lowered by 7.44 million tonnes from the May estimate to 790.8 million tonnes.
Keep in mind that the global numbers did include the increased production estimates from the U.S. Although the production estimate is larger than the 787.6 million tonnes produced last year, global ending stocks are expected to drop by 7.3 million tonnes.
Reductions in the EU, Russia and Ukraine crops more than offset the gains in U.S. production. Wheat output was decreased by 1.5 million tonnes in the EU and Ukraine, while Russian production was lowered by a five million tonnes.
The largest surprise was the decline in the Russian crop to 83 million tonnes, which was caused by frost damage in the black soil, lower Volga and southern Russian growing regions. Drought is also fueling the decline in Russian winter wheat production. The drop in production in Russia, the EU and Ukraine has moved major exporter production to 379 million tonnes.
That reduction also resulted in a drop of 1.7 million tonnes in exported ending stocks to 52.6 million tonnes. This brings major exporter ending stocks to the lowest level since the 2007-08 crop year. The tight level of stocks in the major exporting wheat countries this crop year should provide support for wheat markets.
The large drop in Russian grain production only resulted in a 250,000 tonne reduction in forecast ending stocks. The USDA did lower Russian exports to 48 million tonnes, which is down by four million tonnes from the May report. This is probably the most bullish part of the WASDE report for wheat markets as Russia is the world’s largest wheat exporter.
Ukraine exports were lowered by one million tonnes to 13 million tonnes. Exports from the Black Sea region are being restricted by decreased output this year.
Wheat markets continue to move lower despite positive numbers from the USDA WASDE report. This is largely due to ongoing harvest activity in the southern U.S. The HRW harvest is well underway in Texas and Oklahoma and just beginning in southern Kansas. On June 9, 47 and 48 per cent of the crop was harvested in Texas and Oklahoma, respectively.
Selling pressure from the ongoing harvest across the Northern Hemisphere is pushing wheat markets lower in the short term. The fundamentals in the WASDE report are going to provide longer term support for the wheat markets and currently are being overwhelmed by harvest pressure.
Until the winter wheat harvest in the U.S. nears completion, wheat markets are likely to trade sideways to lower.
Source: Producer