Welch on Wheat: Wheat Supplies and Ending Stocks Increase
WASDE. A modest increase in wheat supplies was shown in the December World Agricultural Supply and Demand Estimates from USDA. U.S. wheat ending stocks were increased 50 million bushels due to a decline in exports. End of marketing year stocks are now estimated at 754 million bushels, up from 704 million last month and above the 712 million bushels expected by the trade. This is the third month in a row USDA has trimmed the export forecast and the second consecutive higher ending stocks.
Wheat exports this year are on a straight line trajectory to meet USDA’s target, but below where we would be in a normal year. Usually we have reached 70 percent of the marketing year export projection by the end of November compared to 58 percent this season.
World wheat supplies are higher by 2.77 mmt as production estimates increased by 3.68 mmt and use declined 1.21 mmt. Offsetting a portion of these supplies was a decrease in estimated beginning stocks of 2.12 mmt. China played the largest role in increasing world wheat production as yield estimates were raised to a record 5 tons per hectare, 74 bushels per acre. Total wheat production in China is now estimated at 120.6 mmt, up from 118.0 in November.
USDA estimates a 95.8 day supply of wheat on hand at the end of the marketing year compared to a 94.2 day supply last month.
El Nino Southern Oscillation Update. This week’s ENSO update continues to forecast neutral conditions for most of the northern hemisphere winter, extending out into spring. This week’s reading of sea surface temperatures in a region critical for El Nino development is -0.1°C.
The precipitation map for the week ahead (Wednesday through Monday) has more green than the past few weeks; but most of the rainfall forecast for the hard red winter wheat production area is light, less than a quarter of an inch.
Commitment of Traders. Index funds continue to hold positions about steady while hedge funds added moderately to long positions in the grains last week. The price index slipped 3 points and open interest is down again after dropping sharply last week. Open interest has stair stepped lower since the peak of the price index in August, particularly at the end of each month.
2013 Wheat Marketing Plan. With increased acres in all grain crops in 2013 and assuming normal weather, I see much more downside risk in grain prices than upside potential. I have already priced 20% of the 2013 crop at a price that is in the top third of July futures prices over the last five years. Given production risk, this is a level of sales I am comfortable with this early in the growing season. I will look to add to sales once we have a better handle on crop conditions this winter.
The ICE Dec and Mar contracts gave back 160 and 87 points on the week, respectively, as last week’s inversion between the two contracts gave way to partial carry. Well,