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While not burdensome, global wheat supplies are sufficient. Hence, wheat has been largely trading along with corn. However, recently wheat has been stronger relative to corn as supply side worries in key exporter nati..

06 Oct 2012

Commodity Online
The US wheat supply and demand balance is more “normal” compared to soybeans and corn. Global stocks are tighter than the historical average, but remain adequate. Deutsche Bank expects potential further downside to Southern Hemisphere supply estimates, as well as the need for wheat to fill the gaps in feed demand left by tight soybean meal and corn supplies.

These should help provide underlying support to the wheat market.

Given these dynamics, Deutsche Bank expects wheat to be range-bound with some downside in 4Q13 contracts. Wheat fundamentals are far less tight than those of soybeans and corn. Specifically, the US wheat stocks-touse ratio was estimated at 28.6% in the September crop report for the 2012/13 crop year, which ends next May. This compares to the historical average of 28.2%. On a global basis, global stocks-to-use is forecast at 21.7% compared to the historical average of 23.1%.

While not burdensome, global wheat supplies are sufficient. Hence, wheat has been largely trading along with corn. However, recently wheat has been stronger relative to corn as supply side worries in key exporter nations have surfaced.

Australia’s crop has been adversely affected by dry weather, particularly across Western Australia. The USDA currently estimates the crop at 26 MMT, but ABARES pegs the crop at 22.5 MMT, with potential further downside. This difference accounts for 50 bps. in terms of global stocks-to-use. Additionally, farmers in Argentina have cut wheat plantings by 22% and recent heavy rains may lead to crop loss in the Buenos Aires province.

Possible export restrictions from Russia have been a primary driver of higher wheat prices (relative to corn prices) recently. Ukraine noted it would consider similar measures, if Russia restricted exports. Indeed, reports have surfaced that the Agriculture Ministry in the Ukraine indicated that wheat exports would not exceed 4 MMT, which is in line with USDA’s current estimates. In Russia, the Agriculture ministry estimates Russia’s 2012/13 grain exportable surplus (including wheat) at 10-12 MMT (vs. last year’s 27 MMT), down from its prior estimate of 10- 14 MMT. Since the start of the marketing year (which began on July 1st), the country has already exported 7 MMT. As a result, even if export restrictions are not officially set, dwindling supplies will eventually price Russia out of the export market by the end of the year.

The Bank notes that last week’s wheat purchase by Egypt did not include Russian wheat as it was priced higher than French and Romanian wheat.

Russia’s Deputy Prime Minister Arkady Dvorkovich has repeatedly indicated that Russia would not impose export restrictions, but previously did not rule out “pinpoint interventions.” Earlier last week, the country’s Economy Minister said the government may consider restricting grain exports, but Dvorkovich quickly ruled it out. He noted that subsidies were a better way to fight the effects of a tight domestic grain market, according to Reuters. Later reports indicated Dvorkovich is also considering
sales from state grain intervention stocks, which contain roughly 5 MMT of grain.

As noted, supplies in the US are ample as the crop was not impacted by drought, like soybeans and corn.

However, dryness in the US Southern Plains is still a concern for winter wheat development when the crop comes out of dormancy in the spring. Recent rains in the region (with more in the forecast) have enabled good winter wheat seeding progress with 25% of the crop planted as of September 23rd, up from 11% the week before, and narrowing the gap with the historical average of 27%. However, conditions are still stressed with 100% of the leading winter wheat state of Kansas enduring severe drought conditions and 51% of the state under exceptional drought down from 60.6% in the prior week.

Given the situation in the Black Sea region, it is widely expected that US exports will begin to pick up at the end of 2012, into 2013. Currently, US export commitments (accumulated exports + outstanding sales) represent 38% of USDA’s annual estimate, below 48% last year this time.

As noted, French wheat has worked its way into tenders from Egypt recently. Eventually, US wheat should as well. The tight situation in feed in the US, particularly in soybean meal, in 2013 should provide support under wheat as it will be used to fill gaps until the 2013/2014 corn and soybean crops come in next fall.

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