Wheat Market Outlook and Prices
The Wheat Market Outlook is provided by Mercantile Consulting Venture Inc.
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September USDA – WASDE Report
- The USDA/WASDE report left the overall US wheat balance sheet unchanged, while increasing global total wheat supply by 4.7 mln mt on higher production and ending stocks.
- The big surprise was that Russian production was increased by 3 mt to 71 mln mt on better than expected winter wheat harvest, and “excellent weather in the spring wheat belt” (which is against everything we have heard). Nevertheless, this increase caused global production to be 3.4 mln mt higher.
- Decreases were seen in Canadian (down 1 mln to 31.5 mln mt) and Australia (down 2 mln to 20 mln mt) wheat production, although less than StatsCan and ABARES numbers (we think StatsCan numbers are too low and Sept is an important growing month for Aussie wheat, so there will likely be further revision of their crop in the Oct report).
- Russian and EU feed/residual numbers were increased to a more reasonable 8% decrease from last year as opposed to 16% in the last report.
- World exports were lowered due to decreases in Canada and Australia. However, EU, Russia (still at 35 mln mt), Ukraine, and US exports were left unchanged (US S&D’s were left entirely unchanged as all changes made within wheat classes were off-setting)
Global wheat production and trade:
There is a lot of competition in the wheat markets as wheat is produced around the world. Below is a brief synopsis on last week’s market events in the major wheat origins.
- Futures: Chicago winter wheat for Dec’18 contract closed at 511-4, up 14-4 cents in Friday’s trade Meanwhile, Dec’18 contract Kansas hard red winter wheat was up 14-4 cents at 516-2. In Minneapolis, Dec’18 contract hard red spring wheat closed at 572-2, up 10-2 in Friday’s trade, while Mar’18 hard red spring wheat closed at 572-2, up 9-4 for the day.
- Pre-report, US futures were up 10-12 cents/bu as there were additional reports from Russia confirming that there is no change to the Russian situation and that the Russian Gov’t will probably limit all-grain exports to around the 30 mln mt mark. Momentum was added to the wheat markets as ABARES in Australia lowered their wheat production further to 19.1 mln mt. The market then sold off following a precipitation forecast (incorrectly) in Australia and following the USDA report. Finally, uncertainty over Russian export constraints prompted a 10-15 cent rise in the wheat market Friday leaving us relatively unchanged for the week.
- Funds: Last week we saw Funds get less bullish on wheat. Funds are near square in Chicago, and while still long in KC, their KC wheat position dropped by ~21%. Fund managers went net short for the first time in several months on Minneapolis hard red spring wheat prices. Any sustained rally in wheat will have to be led by the cash markets.
- Matif: Matif wheat in Europe traded in a €10/mt range but ended the week unchanged.
- Harvest across the prairies is essentially at a standstill as a cold wet system has moved in and is reluctant to leave until mid-week at the earliest. Despite this, as of September 10th, SK producers were able to harvest 46% of the spring wheat crop as harvest progress is well advanced in the SW and SE regions of the province.
- YTD Cdn. wheat deliveries to week 6 (latest CGC data) at 2.6 mln are 13% (+455k mt) ahead of last year’s wheat deliveries (2.1 mln mt). And exports at 2.1 mln mt are 13% (+247k mt) ahead of last year’s (1.9 mln mt). Export terminal receipts are also ahead of last years by a respectable 20% (+481k mt).
- SK durum was 73% harvested as of September 10th. Sixty percent of the durum crop is estimated to be 1CW while 34% of the crop is estimated to be 2CW and 6% is estimated to be 3CW.
- Regarding Canadian grower bids for wheat, note that in the chart below the blue columns show the bids for deferred delivery. As can be seen, the carry charges have widened and the prices bid for May in SK are not too bad.
- The USDA managed to arrange the changes in the US wheat S&D by class in such as way that there was no overall change to the US total wheat situation from the Aug to Sep reports.
- HRW and Durum ending stocks were increased 15 mln and 5 mln bu, respectively, which was perfectly off-set by decreases in HRS (-10 mln) SRW (-5 mln) and White (-5 mln). Overall, HRS, Durum and White wheat production is est. to be 198 mln, 9 mln, and 18 mln bu higher Y/Y while HRW is seen 89 mln bu lower.
- Total exports are estimated to be higher in all classes for a total of 124 mln bu.
- Ending stocks are lower for Durum, SRW and SRW by 171 mln, 32 mln and 22 mln bu, respectively, while HRS is est. to be 61 mln bu Y/Y.
- As per the USDA report, US durum Y/Y changes were: Production +18 mln bu; supply: +11; domestic consumption: -1 mln bu; exports: +12 mln bu; total use: +11mln bu, which means ending stocks are to be unchanged from last year (which is up 5 mln bu from the August report).
- USDA took 500k m off old crop Australian wheat exports, adding them into the 2018/19 carry-in. USDA took 500k mt off the 2018/19 feed demand, so with a 2 mln mt drop in exports offsetting the lower crop number (20 mln mt), Australian ending stocks actually rose by 1 mln mt (according to USDA).
- However, Australian wheat futures continue to hit contract highs on continued dryness and feed markets continue to pay well above Fob equivalent (over A$400 for wheat and barley, A$500 for hay). Large tonnages of wheat continued to move from the west of Asutralia to the east.
- ABARES (Australian stats agency) lowered wheat production further to 19.1 mln mt.
- Confusion persisted over taxes, and no new export licences were taken out last week.
- BAGE (Buenos Aires Grain Exchange) implied potential yield losses due to the ongoing lack of rain although Gd/Exc ratings were up marginally for the week at 48% (versus last year’s 66%).
- The USDA made no changes to either the old or new crop Argentine wheat balance sheet.
- The USDA left the EU crop and export numbers unchanged, despite all the evidence to the contrary. Meanwhile, a higher carry-in and imports offset a 1 mln mt increase in feed usage, thereby leaving end stocks unchanged at an unsustainable 3.5 week’s supply.
- EU shipments are still down 41% compared to last year.
- Algeria bought 630k mt of French wheat, so French wheat could potentially capture a large share of Friday’s Saudi tender.
Black Sea wheat:
- Russian data suggests that by the end of September, wheat shipments could hit 14 mln mt. The trade will now watch to see if the Govt follows the USDA’s revised 71 mln mt crop number.
- Black Sea Fob wheat prices ended down US$5/mt with CBOT futures off $4/mt and the Sep-Dec carry charge still at US$21/mt.
Significant purchases/ trades:
There was a good volume of cash trades last week:
- Egypt (GASC) bought 235,000 mt of Russian wheat for 25 Oct-4 Nov at US$240.25/mt.
- Algeria bought 630,000 mt for Nov at $262.50/mt (we think this was mostly French wheat).
- Saudi Arabia bought 635k mt of wheat for Nov-Dec arrival against the tender for 595k mt at prices ranging from US$267.63/mt (Jeddah) to US$274.37 (Dammam). Prices were slightly lower than expected. Most of the wheat reportedly was sold from longs in the Baltic/ Germany, though French wheat was very competitive.
- Tunisia bought 50,000 mt of soft wheat at an average US$231.75/mt, plus 75,000 mt of durum at US$270/mt.
- US wheat inspections were 429,000 tonnes (season total 209 myn bushels down 31%), sales were 388,000 tonnes (season total 358 myn bushels down 24%). Iraq imports are expected to increase following the Government decision to cut the irrigated area by 50% due to water shortages.
- Turkey banned the writing of contracts in US dollars or in Euros, and Turkish flour mills reportedly halted production due to new flour export regulations.
- There are reports of 65 Turkish flour mills halting production due to the new flour export regulations (not bullish Russian Wheat).
- Algeria bought 630k mt of French wheat, so French wheat could potentially play a significant role in the big 595k mt Saudi wheat tender.
- The USDA/WASDE report left US wheat S&D’s unchanged, while increasing global total wheat supply by 4.7mln mt on higher production and ending stocks.
- The big surprise was that Russian production was increased by 3 mln mt to 71 mln mt on better than expected winter wheat harvest, and “excellent weather in the spring wheat belt” (this is against everything we have heard). Nevertheless, this increase caused global production to be 3.4 mln mt higher.
We don’t expect major weakness in the grain markets, which will probably be a little supportive to a bearish oilseed outlook. Politics and outside influences are still a major factor in the markets and there is talk of new duties and a meeting with the Chinese. The numbers show that so far, Trumps badly conceived duty activities have prejudiced the USA more than to the Chinese. Trade in July shows further negatives in the trade balance between China/USA with a 7% loss to the USA mainly in agriculture and machinery products, and gain in Chinese imports into the USA. In our view, Trump needs to be very careful – the Trump administration is in danger of triggering inflation, which given the USA’s record debt load could bring on another massive recession. There were also new comments that the Russians will put export duties on Russian wheat once 30 mln tonnes of sales are achieved.
Cash wheat markets remain essentially about Russian wheat, and if/when Russia will run out of cheap wheat. Funds are near square in Chicago, but still long in KC, so any sustained rally in wheat will have to be led by the cash markets.
Canadian bids for deferred delivery wheat are pretty good. Note the chart on page 3; it shows that carry charges have widened and the prices bid in SK for May wheat are not too bad.
Primary Elevator Bids
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Primary elevator bids data source: PDQ
Grade Spreads in Canadian Dollars
Relevant FOB Prices and Calculated Basis
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