With More Supply, Who Will Buy the Price Dip?
Grain markets continued to see selling through the second week of December as speculators took some profits off the table, thanks to a slightly bearish WASDE report published by the USDA. Larger supplies in Russia, Canada, but mostly Australia have eased traders’ concerns about tighter inventories, pushing them to the sideline. Hedge funds reduced their net-long positions in all 3 wheat futures markets, including moving to a net-short position in Chicago’s SRW wheat for the first time since the end of October.
Coming back to the December WASDE, the USDA matched the figures that government agencies from Australia and Canada provided the previous week, adding 3.2 MMT to global supplies. For Canada, the extra 700,000 MT in production was put directly into the carryout column, as total exports were stayed at 15 MMT. Russian wheat production was also raised by 1 MMT, but most of it is expected to go into feed use, so ending stocks were only raised by 200,000 MT. Ultimately, despite the upward revision in production, worldwide wheat supply to end the 2021/22 crop year are still pegged at a 5-year low.
Specific to the Land Down Under, the USDA increased production to 34 MMT, up 2.5 MMT from November’s estimate, albeit this is 400,000 MT less than the 34.4 MMT that ABARES published at the start of the month. Worth also mentioning is that the USDA added an extra 300,000 MT to Australia’s previous harvest (2020/21 crop year) to now sit at 33.3 MMT. With the larger crop, Australian exports for the current crop year were increased by 2 MMT to a new record of 25.5 MMT, and despite this, ending stocks still increased by nearly 1 MMT from last month’s forecast. That said, the USDA admitted that the extra production in Australia would likely be headed to the feed market, because of the heavy rains part of the crop received in November (which we’ve discussed in the Wheat Market Insider the last few weeks).
Coming closer to home, the USDA reduced their expectations for U.S. hard red spring wheat exports as, due to their higher prices, international buyers are opting for some cheaper options. U.S. HRW wheat exports were also reduced, increasing ending stocks for both classes of wheat in the U.S., which is, again, why investors are a bit less concerned about available supplies. Nothing on the U.S. durum balance sheet was changed.
It was a similar story for U.S. corn and soybeans as not much was changed on either balance sheet. Most of the attention of traders for these crops is on South America, where the growing season is reaching a mid-way point. Although the USDA did not change any production estimates in Brazil or Argentina, dry weather is still a concern. While conditions in major producing areas in central and northern Brazil are really good, southern Brazil remains fairly dry and that’s limited the selling in soybeans (and why they were the only crop with a green performance this past week). Argentina did receive some healthy rains last week but the forecast for future moisture is spotty.
Coming back to North America, soil moisture conditions in major wheat-producing areas continue to receive attention, led by the U.S. winter wheat belt. In Oklahoma, 93% of the state is experiencing some level of drought while about half of Kansas, America’s largest wheat producer, is at least abnormally dry. Here in Canada, minimal moisture events through the end of November continue to also keep much of the Prairies in a state of severe to extreme drought. While it’s still early in the season, wheat buyers are certainly watching these maps as they start to think about 2022 new crop purchasing.
Overall, while there is some extra wheat to go around, this turns down in prices over the last few weeks will likely encourage some more buying as the broader fundamentals have not changed all that much. Feed wheat prices have also seen a pullback, reflecting the broader futures market sentiment, but they remain incredibly elevated year-over-year. Looking at where prices went a year ago, there’s likely a good chance that the recent pullback will flatten out before improving a bit again in the deep winter months when more feed is usually needed.
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