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Global production issues lend support to price surge, but rally could vanish quickly.

Naomi Blohm, senior market adviser

July 9, 2020

4 Min Read
green and yellow wheat field

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.

 Reach Naomi Blohm: 800-334-9779 Twitter: @naomiblohm   and [email protected]

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

About the Author(s)

Naomi Blohm

senior market adviser, Total Farm Marketing by Stewart Peterson

Naomi specializes at helping farmers understand how to manage cash marketing needs and understand the importance of managing basis, delivery point considerations, cash flow needs and storage capacity. She earned her Bachelor of Arts in Political Science with a minor in Agriculture Business at the University of Wisconsin in Platteville. She has a Master of Science in Adult Education with an emphasis in Ag Economics from the UW-Platteville and a Master Certificate in Global Education, from the UW-Oshkosh.

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