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Wheat Outlook: Sluggish Demand Reflects Competitive Global Marketplace

Ernst Undesser
From USDA January 17, 2018

Wheat Outlook: Sluggish Demand Reflects Competitive Global Marketplace

Newly released USDA National Agricultural Statistics Service (NASS) reports inform multiple balance sheet changes this month. The NASS Grain Stocks report indicates lighter-than-expected all-wheat disappearance through the first half of the 2017/18 marketing year.

Upward revisions to first and second quarter ending stocks imply reduced feed and residual use, lowered 20 million bushels this month to 100 million, and contribute to a 29 million bushel increase in 2017/18 ending stocks.

Competition among exporters is increasing, most notably from Russia, for which exports are increased to a record-setting 35.0 million tons this month on larger production, stocks, and pro-export Government policies. Argentina is also proving to be a formidable wheat exporter, with a 500,000 ton export increase this month to 13.0 million.

Strengthening global competition has put downward pressure on U.S. production and planted area. The NASS Winter Wheat and Canola Seedings report indicates lower winter wheat planted area in 2018 compared to 2017, though seed use is level year-to-year.

Domestic Outlook

Domestic Changes at a Glance

  • The latest USDA-NASS Grain Stocks report indicates lower-than-expected disappearance through the first half of the marketing year, as reflected in the December 1 stocks and the revised September 1 stocks.
  • Feed and residual use is cut 20 million bushels on sluggish disappearance through the second quarter.
  • U.S. all-wheat ending stocks are raised 29 million bushels on increased supplies, including a 5 million bushel increase in imports, and reduced domestic use.
  • Winter wheat seedings for 2018/19 exceeded expectations and are estimated by USDA-NASS in the Winter Wheat and Canola Seedings report to total 32.6 million acres.
  • Seed use for 2017/18 is lowered 4 million bushels to 62 million on the forecast reduction in planted area and is on par with the 2016/17 seed use estimate.
  • The U.S. season average farm price is unchanged and remains at $4.60 per bushel.

2018 Winter Wheat Seedings Second-Lowest on Record

Winter wheat seedings for the 2018/19 marketing year are estimated at 32.608 million acres, slightly below the 2017/18 seeding estimate of 32.696 million acres. Winter wheat seedings for the next marketing year are projected to be the lowest in 109 years; however, the USDA, NASS estimate, based on 82,000 farmer surveys, generally exceeded industry expectations.

The current projection for 2018 is down less than 1 percent and 88,000 acres from 2017 and down 10 percent from 2016. Hard red winter (HRW) wheat planted area is projected to total 23.1 million acres, a decline of 2 percent from 2017, while soft red winter (SRW) planted area is forecast up 4 percent, year-to-year, to nearly 6 million acres.

In mid-to-late December, a snow event increased winter wheat coverage and insulation for Northwestern and Midwestern wheat as well as wheat growing from Nebraska and to the northern border. Winter wheat in the southern half of the Plains, however, did not receive additional snow cover, and conditions in Kansas, Colorado, and Oklahoma (Southern Plains) deteriorated in the last month of 2017.

When a blast of cold air arrived toward the end of 2017, stress mounted on a Southern Plains winter wheat crop that was already characterized as poorly established. The latest crop progress and condition ratings (released in early January) indicated that between November 26 and December 31, the percent of winter wheat rated very poor to poor increased by 8 percent in Kansas, 14 percent in Colorado, and 32 percent in Oklahoma.

For the month of December 2017, 77 percent of topsoil moisture was rated very short to short in Kansas, 84 percent in Oklahoma, and 60 percent in Colorado. States will release updated crop weather reports at the end of January. Weekly updates on the intensifying drought in the South and parts of the High Plains, can be found on the U.S. Drought Monitor website.

Balance Sheet Changes

Multiple NASS data releases result in several balance sheet adjustments. For 2016/17, updates are limited to ending stocks, and to quarterly HRW and durum specifically; net reductions lower all-wheat ending stocks to 1,180.6 million bushels, based on the USDA-NASS Grain Stocks report.

The latest back-year, wheat by class, by quarter changes are documented in the “Historical Tables” located in the Wheat Data section of the USDA-ERS website.

Revised carryout for 2016/17 implies very slightly reduced carry-in for the 2017/18 marketing year.  Imports are raised 5 million bushels this month to 155 million, largely based on the strong pace of imports in November, a continuation of a multi-month trend and an indication of tight stocks of milling-quality hard red spring (HRS) and durum wheat in the United States.

The current pace of wheat (grain only) imports from Canada exceeds by 20 percent the 4-year average pace with 1.6 million tons imported between June and November of 2017. For the same period in the 2016/17 marketing year, just .992 million tons were imported. To date, imports of HRS from Canada have constituted about 51 percent of total wheat grain imports, a sharp increase from 27 percent a year ago and the 4-year average of 42 percent.

With no changes made to all-wheat production, the combined 5 million bushel increase in imports and slight, 68,000 bushels decrease in carry-in result in a net 4.932 million bushel increase in 2017/18 supplies.

In advance of the February 1 release of the USDA-NASS Flour Milling Products report, all-wheat food use is unchanged this month. Following the February 1 NASS report, all-wheat food use, including net trade volumes, will be assessed. Any revision to the marketing-year food use figure will appear in the February 8 WASDE with further explanation published in the February 12 Wheat Outlook newsletter.

Elsewhere in use, seed use is lowered 4 million bushels to 62 million on the basis of revised winter wheat planted area expectations and seed use associated with the baseline out-year projections for durum and other spring wheat. The current projection incorporates expectations of proportionally greater SRW wheat seedings, as compared to the previous year.

SRW seeding densities are higher than for other wheat varieties and help to support the 2017/18 seed projection at the same level as the previous marketing year, despite expectations of slightly lower all-wheat planted area.

Feed and residual use is lowered 20 million bushels this month to 100 million. Reduced feed and residual use is supported by higher-than-expected stocks for the first 6 months of the marketing year, based on increased September 1 and December 1 stocks estimates from USDA, NASS.

The location of stocks, relative prices, and other market factors, provide support for a 10-million bushels reduction in HRW feed and residual use to 45 million. Soft red winter wheat, for which there has recently been an uptick in demand from export markets, has feed and residual use lowered 5 million bushels to 45 million.

In light of the improved quality of the 2017/18 durum crop, relative to the previous year when a higher-than-normal share of the crop was graded #4 and #5, durum feed and residual use has been lowered 5 million bushels to zero.

Continued strong imports of durum from Canada are indicative of strong demand for durum in milling (and not feed use) channels. Based on the current projection, fully 90 percent, and 90 million bushels, of the feed and residual forecast are attributed to HRW and SRW.

This compares to a 5-year average of 90.5 percent and reflects the relative palatability and economics of feeding these wheat varieties, as compared to other wheat classes.

U.S. exports on both a marketing-year and trade-year basis are unchanged this month and remain at 975 million bushels and 26.0 million tons, respectively. Pressure from expanding Russian production and exports has dampened U.S. prospects mainly in North African countries such as Egypt and Nigeria.

This trend is reflected in the latest forecast, and an increase in Russian exports again this month is not expected to further hinder U.S. market share in the North African region.

Approximately 65 percent of the 2017/18 wheat crop has been marketed through November, limiting the impact that minor, month-to-month, price fluctuations have on the all-wheat season-average farm price (SAFP).

Modest upward movement in cash and futures prices in the last month were largely anticipated and do not suggest an upward revision to the current SAFP, which remains at $4.60 per bushel. The price range is also unchanged this month and remains at $4.50 per bushel on the low end and $4.70 on the highend.

Full report.

Ernst Undesser
From USDA January 17, 2018