October WASDE Shows Tighter Wheat Balance Sheet
Grain prices got to the middle of October on a mixed note as HRS wheat continues to find some bullish legs while soybeans were the biggest loser, thanks to a mostly bearish USDA WASDE report last week. Compared to the market’s pre-report expectations, the USDA published higher numbers for both corn & soybean harvests, as well as ending stocks.
More explicitly, the USDA is expecting U.S. 2021/22 corn ending stocks to come in at 1.5 billion bushels, 92M bushels higher than September’s estimate and 68M more than the average pre-report guesstimate. Similarly, U.S. soybeans stocks are now pegged at 320M bushels, 20M higher than what the market expected to see printed. Finally, adding to soybeans’ bearish woes, farmers in Mato Grosso, Brazil’s largest soybean-producing state, have seeded 45% of the crop to date, well above the seasonal average and last year’s pace of about 25%!
Coming back to the WASDE, the USDA lowered global 2019/20 wheat ending stocks (excluding China) by nearly 3 MMT, which obviously trickled into the 2020/21 and current 2021/22 crop year. Combined with increased exports from the 2020/21 crop year with Australia (+1 MMT to 24 MMT) and Argentina (+500,000 MT to 11 MMT), the USDA lowered 2020/21 global ending stocks (again, excluding China) down by more than 4.2 MMT to 144.2 MMT. This accounting update for the last couple of crop years is important to note because, as mentioned, it trickles down into the current 2021/22 crop year.
Adding to the inventory decline was the USDA lowering harvest totals in Canada (-2 MMT to 21 MMT) and America (-1.4 MMT to 44.8 MMT). More specifically the U.S., durum production was raised while domestic use was lowered, meaning ending stocks went up by about 2M bushels (or 54,400 MT if converting bushels into metric tonnes) to now sit at 20M bushels (544,311 MT). Similarly, American hard red spring wheat 2021/22 ending stocks were also raised by 2M bushels to now sit at 113M bushels (or 3.08 MMT) after production and export volumes were both lowered, notably, the latter by 15M bushels (or 408,230 MT).
Looking more globally into the 2021/22 wheat balancing sheet, the USDA increased exports for Australia (+500,000 MT to 23.5 MMT) and the EU (+500,000 MT to 35.5 MMT). As a reminder from last week’s column, because of the ever-changing Russian wheat export tax, the pace of the EU’s wheat exports is up 45% year-over-year. All of these updates add up to the USDA dropping global wheat ending stocks from the September report to this October WASDE by 6 MMT to now sit at 136.2 MMT in this past week’s October report. If realized, this would be the smallest global wheat carryout since the 2016/17 crop year!
Outside of this past week’s WASDE headlines, Iran admitted that it will need to import a record 8 MMT of wheat this crop year due to the devasting drought-driven impact on yields in the Middle Eastern nation. Also, we continue to hear reports of poor quality in France, with barely one-third of the wheat crop being able to meet milling specs. Further, FranceAgriMer just lowered its estimates for France’s wheat carryout by 500,000 MT to now sit at 2.4 MMT.
Overall, this past week’s WASDE report, combined with the quality issues out of Europe, continues to catalyze HRS wheat prices higher. I continue to see comparisons to the 2007/08 crop year when we had similar global production issues and thus, I believe HRS wheat prices have more room to run. As the chart below of the 2007/08 crop year’s HRS futures values shows, the first calendar quarter of the year was when we saw the peak of the market.
Keep in mind that this is historically consistent with when the top of the wheat market is seen, but the difference being that the highs were amplified in 2007/08 because of both a shortage of supply and increased demand for higher-protein wheat, due to blending needs. Quite conclusively, I see a similar market dynamic emerging this year as to that of 2007/08, which means that assuming my cash flow needs can be satisfied by other crop sales, I’m willing to wait a while before selling any more wheat.