USDA Surprises Wheat Market with Lower Ending Stocks Forecast

There will not be quite as much wheat left in the world at the end of marketing year 2014/15 as previously thought. This according to revised world agricultural supply and demand estimates (WASDE) released by USDA on Oct. 10. The bullish news trumped an increase in projected global production and the WASDE proved supportive to futures markets for the first time in months. Combined with a slight decrease in beginning stocks, a 4.1 million metric ton (MMT) increase in expected global consumption accounted for the lower ending stocks estimate.

In what came as a surprise to many analysts, USDA decreased its projected ending stocks by 2 percent from the September estimate to 193 MMT. It was the surprise more than the number that helped push futures higher. If realized, ending stocks would still be 4 percent higher than last year and greater than the five-year average of 191 MMT.

For months, expectations for record global production and record supply have weighed heavily on the market. USDA increased projected production to by 1.17 MMT to 721 MMT, which would exceed last year’s record crop of 715 MMT. Final harvest reports from the Northern Hemisphere showed higher than expected yields. Yet, an 870,000 metric ton decrease in estimated beginning stocks to 186 MMT helped offset the production increase and kept the bears away from the market.

The most significant change was a 4.1 MMT increase in expected global consumption. If realized, consumption of 713 MMT would be a 3 percent increase over the record 695 MMT set last year. This month’s increase included a 2.55 MMT increase in projected feed use of 140 MMT. Despite USDA’s expectation of record corn production and relatively low corn prices, wheat used for feed will be the second highest of all time, if realized. This is a reflection of the production struggles in every major wheat-producing country in the northern hemisphere this year, resulting in a higher percentage of low-quality wheat. France, the block’s largest wheat producer, had well-documented quality issues this year and a sharp reduction in the amount of milling quality wheat. The European Union uses more than twice the amount of wheat for feed than China, the world’s second largest wheat feeder. USDA believes the EU will increase wheat used for feed by 20 percent in 2014/15 to 57.5 MMT, well above the five-year average of 53.3 MMT.

USDA also lowered expected U.S. ending stocks by 1.21 MMT to 17.8 MMT, despite a slight increase in production estimates. The pace of commercial sales has picked up in the last few weeks, prompting USDA to raise the export projection by 680,000 metric tons to 25.2 MMT. If realized, U.S. exports will still fall well below last year’s 32.0 MMT (when China and Brazil each imported more than 4 MMT of U.S. wheat) and the five-year average of 29.4 MMT. According to USDA, the higher export projection combined with higher domestic feed use will leave less wheat in the bins at the end of the marketing year.

USDA’s reduction in expected ending stocks both globally and in the United States helped push wheat futures higher in the days following the WASDE release. Considering futures had faced five consecutive weekly of losses in September and October and hit four-year lows, the markets quickly reacted to some bullish news.

By Casey Chumrau, USW Market Analyst