After a mostly quiet week of grain trade wheat futures enjoyed a surprise rally higher on Wednesday this week. Funds exited short positions in Chicago and Kansas City futures swiftly as news emerged of declining production estimates in the United States, France, and Russia. The French Farm Ministry announced that production could be cut to 31.3 million tonnes, which is a 21% drop from a year ago. Looking at Russia, their weather forecast is calling for hot and dry weather, which may affect their spring wheat production.
Another unexpected shock
For the past few years, global wheat production and global wheat ending stocks have been viewed as more than sufficient. The fact that wheat is grown abundantly all around the world in both hemispheres has given end users the notion that wheat will always be available in a timely manner whenever it is needed.
The odds a catastrophic crop failure in multiple locations at once has been slim. The market has always assumed that wheat would available somewhere in the world to offset a production cut in one location. So now the headline that three major wheat producing nations may be seeing production cuts was enough to get the funds to exit some of their net short positions.
Impact on U.S. wheat prices
In the United States, supplies of wheat have been trending lower since 2016. In 2016 all wheat production was a hearty 2.3 billion bushels. At that time, ending stocks swelled to a record amount near 1.2 billion bushels as wheat demand diminished due to a combination of ample global production and reduced demand for U.S. wheat. In the years following, U.S. wheat prices suffered, leading to lower planted acreage numbers.
Looking at recent history, on the June USDA report, all U.S. wheat production was announced at 1.877 billion bushels. U.S. ending stocks for the 2020/21 season came in at a larger than expected 925 million bushels, up from the May USDA estimate of 909 million bushels.
On Friday’s upcoming USDA report, traders are expecting all wheat production to come in near 1.848 billion bushels. Ending stocks are expected to increase again to 948 million bushels.
If ending stocks continue to increase, prices may have a hard time rallying, unless weather issues here and around the world can take center stage.
Global supplies no longer collosal
Prior to the recent announcement of production cuts due to adverse weather conditions, global wheat supplies were again viewed as colossal. The June USDA report pegged 2019/20 global ending stocks at 295.84 million tonnes. New crop ending stocks came in at an even larger 316.09 million tonnes.
Looking ahead to Friday’s USDA report, trade is expecting global wheat carryout to come in at a slight reduction at 315.9 – yet, still a record high.
The bottom line: unless global weather issues persist, the wheat rally may run out of steam as record global ending stocks may temper bull trader’s ambitions.