Wheat stocks report does not account for storage, quality

By Casey Chumrau, USW Market Analyst 

Fundamental supply and demand factors can explain the dramatic downtrend in global wheat prices and futures markets the past few months. In principle, high supply leads to low price. In practice, the global wheat market is a much more complicated and dynamic scenario. A closer look reveals the supply of high-quality milling wheat may be less accessible than it appears. 

In its quarterly grain stocks report released Sept. 30, USDA indicated that total U.S. wheat stocks on Sept. 1 were 2 percent higher than a year earlier. This is largely due to a slower export pace than last year when Brazil and China were aggressively importing U.S. wheat. 

What the report did not show is that USDA’s U.S. stocks estimate of 2.16 million metric tons (MMT) is 11 percent lower than the five-year average for this quarter. The number that really stands out, however, and is more relevant to the world’s wheat buyers is the location of those stocks. 

USDA reported this week that 30 percent more wheat was being stored on farms in the United States on Sept. 1 compared to the same date last year. USDA’s report of a 9 percent decrease in wheat that has left the farms compared to last year does reflect the large crop. There is little doubt, though, that U.S. farmers are willing and able to hold on to more of their old- and new-crop wheat until they can get a better price. In turn, this trend holds down effective U.S. stocks available for export. 

USDA indicated that Russia harvested its third largest wheat crop of all time this year at 59.0 MMT. It is the second consecutive bumper crop there. However, the country seems to be exiting the export market earlier than in years past. The Russian agricultural minister announced recently that instead of implementing any type of export embargo, the Russian government would instead use intervention pricing to protect the domestic market. In recent days, the government has bought wheat at much higher than market prices, taking even more supplies away from export markets. 

China and India have produced a combined 31 percent (270 MMT) of the world wheat supply on average the last five years but represented less than 3 percent of total world exports, according to USDA. The two top wheat producers in the world are also the top two wheat consumers, using almost everything they grow. India reached a record high 6 percent of world market share in 2012/13 but USDA expects India will only capture 2 percent (3.0 MMT) of world exports this year. USDA projects the two countries will account for a combined 41 percent (79.6 MMT) of global carryout stocks at the end of 2014/15, stocks that are unlikely ever to leave their countries of origin. 

The condition and quality of wheat stocks that are actually available to the world market also carry concern. Every major wheat producing country in the northern hemisphere had quality issues in the 2014 crop. France, the EU’s largest wheat producer, is perhaps most notable. Analyst group Stategie Grains estimates that just 64 percent of the country’s 37.6 MMT crop is of milling quality, down from 88 percent last year. France has had difficulty meeting minimum quality specifications, including those of Algeria, its top customer. 

The world may be full of wheat this year but the availability and condition of that wheat are factors the world’s wheat buyers must also consider. Customers looking for specific qualities and proteins will have to dig deeper, sooner rather than later, before those supplies dwindle from the export market.