Market analyst Malcolm Bartholomaeus, Bartholomaeus Consulting.

Reports prompt wheat price fall

Unfavourable USDA reports have caused the wheat futures market to fall sharply.

The test for wheat futures was whether we would get through the January USDA Reports with prices holding in the new, higher trading range seen since the beginning of the month. We now know the answer:  No.

A range of supportive issues had seen CBOT futures go from the December trading range of 410 to 428 USc/bu, to a range between 425 and 437 USc/bu.  It had been hoped that the lower end of this new trading range would hold, to build a platform for further price gains in the first few months of 2018.

However, the USDA released a range of reports covering US planted wheat acres, US grain stocks, as well as their monthly US and global Supply and Demand estimates. None of these reports was friendly for wheat, and the market reacted by falling sharply, dragging prices down as low as 418.75 USc/bu before staging a modest recovery to 420.5 USc/bu into the close of trading last Friday night.

The main drive for the losses was a surprisingly small drop in estimated planted acres for US winter wheat this year.  We have still seen a drop in area of some 88,000 acres, to the smallest planted area in 109 years, but a larger pull back in acreage had been expected.

In trying to understand why US farmers have stuck to a larger area of wheat than expected, given the very low prices, one suggestion was that growers are simply running with a crop that is low cost in the US. Although current, and projected, prices might not be that strong, if it is low cost to produce it presents US farmers with a low risk option.

Quarterly stock estimates for wheat  in the US were also above trade expectations, as were ending stock projections. The indication is that less wheat is being used for feed in the US. Use of wheat for feed within the US has been cut to a seven-year low.

Estimates for US wheat exports for this year were left unchanged in total, but recent slow export sales and shipment numbers are creating some concern that the current projections are going to be difficult to achieve.

Globally, wheat supplies for the current year were reduced slightly, thanks to a drop in opening stock levels driven largely by a 3.14 million tonne write down of the 2016/17 wheat crop in Australia by the Australian Bureau of Statistics.  That was enough to more than cover the 1.8mt increase to global production estimates for 2017/18.

Apart from the greater than expected wheat acreage in the US, not much has changed to the outlook for 2018. We are at the mercy of what happens to production in the Black Sea region. It needs to pull back by enough that residual stocks from 2017, and any recovery in output from Canada, the EU and Australia, are not able to cover the drop in Black Sea output.

Meanwhile the Australian market has to adjust to the current domestic supply situation, as well as the downward pressure that is likely to come from lower CBOT wheat futures values.

The drop in the estimated size of the 2016/17 Australia wheat crop was unexpected, but explains why our domestic market has behaved as it has this year, with strong east coast prices attracting movements of feed grain from as far away as SA.

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