While global 2019/20 wheat production is virtually unchanged from the November 2019 forecast, cuts for key U.S. competitors—Argentina, Australia, and Canada—create potential opportunities for U.S. export advancement. Trade year exports for Argentina, Austalia, and Canada are reduced 0.5 million tons, 0.4 million, and 0.5 million, respectively.
Lower exports for these countries are partially offset by higher exports for the U.S. and Russia. Total U.S. commitments are up 11 percent relative to the same time last year and U.S. price competiveness in some markets has improved; however, the U.S. share of global exports remains virtually unchanged from 2018/19. While Russia’s exportable supplies are lower this year, the country continues to command the greatest share of global wheat exports.
Domestic Changes at a Glance:
- U.S. ending stocks are lowered 40 million bushels this month, to 974 million, on both reduced supplies and a projected export increase.
- The current projected carryout is the lowest since 2014/15 when ending stocks were 752.4 million bushels.
- U.S. all wheat imports are lowered on the slow pace of hard red spring and durum wheat into the U.S. from Canada and is consistent with the September 30 USDA, National Agricultural Statistics Service (NASS) Grain Stocks report indicating ample stocks of wheat. These wheat classes were located in the Northern Plains States.
- At 105 million bushels, U.S. wheat imports are at the lowest level in 9 years.
- Exports are raised 25 million bushels on export sales and shipments to date, with competitive U.S. prices and prospects to capture some of the global wheat market created as production and export forecasts for key competitors, Australia, Argentina, and Canada are lowered.
- The 2019/20 season-average farm price is lowered 5 cents per bushel to $4.55 on weaker-than-expected seasonal price recovery, as indicated by monthly NASS prices reported through October 2019 and in recognition that a sizable portion (an estimated 65 percent) of the 2019/20 crop has been marketed through October.
- Three key wheat-related reports will be released on January 10, 2020 by USDA, NASS: Crop Production, Grain Stocks, and Winter Wheat and Canola Seedings.
Winter Wheat Heads into Dormancy
Indicative of slower-than average planting progress, by the week ending November 25, USDA, NASS reported that 92 percent of the winter wheat crop had been planted, compared to the 5-year average of 99 percent. Like last year, delays in sowing were reported in several key winter wheat-producing States.
In fall of 2018, farmers were delayed by wet conditions and the postponed harvest of 2018 row crops. This year, dry conditions in the fall in the Southern Plains encouraged some farmers to postpone sowing of Hard Red Winter wheat—and opportunities to graze livestock on wheat pasture—while they awaited rains that would replenish the relatively low soil moisture.
In the Eastern Corn Belt, a later-than-usual growing season for row-crops, brought about by lengthy planting delays in the spring, likely delayed some Soft Red Winter seedings.
As the planting window closes on 2020 winter wheat, challenging sowing conditions may encourage some farmers to skip planting winter wheat and instead plan to sow other crops in spring, potentially reducing winter wheat planted area beyond current expectations. At this point in the winter wheat production cycle, it is too early to assess the potential impacts of slower-than-expected sowing will have on production.
Historically, a direct link between planting progress in fall and ultimate winter wheat production is statistically weak. Factors such as weather in spring and summer are more impactful through their effects on yields. The NASS January Winter Wheat and Canola Seedings report will provide the first official estimate of 2020 winter-wheat-planted area and a basis for reviewing the production forecast.
As the 2019 winter wheat crop heads into dormancy, winter wheat emergence is reported to be behind schedule. Dry conditions have persisted in a large swath of the High Plains, inhibiting winter wheat development. When last reported by NASS, emergence of the 2020 winter wheat crop trailed the 5-year average by 3 percentage points.
In Kansas, where the southwest corner is mired in a mix of abnormally try to extreme drought conditions, winter wheat emergence (as of week 47) was 89 percent, slightly ahead of last year’s delayed pace but nearly 4 points behind the average.
Wheat Price Trimmed On Lackluster Price Improvement
The all-wheat season average farm price (SAFP) is lowered 5 cents this month to $4.55 per bushel on weaker-than-expected seasonal price recovery. Since mid-November, both futures prices and cash prices have continued to show modest improvement; however, these largely season movements have not been enough to support the previous $4.60 per bushel price forecast.
With a large share of the 2019/20 wheat crop already marketed at relatively low prices, month-to-month price improvement for the remainder of the marketing year must be combined with significant marketings in order to advance the SAFP.
Brazil’s Implementation of a TRQ for Wheat Cracks Open the Door for Expanded U.S. Exports
When Brazil joined the World Trade Organization in 1994, the country committed to implementing an annual 750,000 metric ton duty-free tariff rate quota (TRQ) for wheat imports. In March of 2019, President Bolsonaro of Brazil and President Trump came to an agreement on implementing the TRQ, though the implementation timeline remained unclear.
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On November 14, 2019, the Government of Brazil announced the immediate implementation of a TRQ for non-Mercosur trading partners. (Mercosur is a South American trade bloc whose current full members are Argentina, Brazil, Paraguay, and Uruguay.) This development effectively removes a 10 percent tariff on wheat imports up to the TRQ volume limit and has the potential to enhance U.S. and other non-Mercosur countries access to the 3rd largest global importer of wheat.
For the 2018/19 local marketing year (Oct-Sept), Brazil is estimated to have imported 7.0 million metric tons of wheat, of which nearly 95 percent originated from Mercosur trading partners. Mercosur member Argentina supplies most of the wheat exported to Brazil. Over the past several years, Argentine wheat production has surged and provided wheat in quantities and at quality levels sufficient to meet nearly all of Brazil’s demand.
In addition to large exportable supplies, Argentina benefits from duty-free access to the Brazilian wheat market under Mercosur and lower relative transportation costs. These advantages make Argentina a formidable competitor; however, there have been opportunities for the U.S. to periodically make sizable sales to Brazil.
For example, during periods when Argentina’s exportable wheat supplies were limited, Brazil removed duties on non-Mercosur wheat. As a result, in the 2013/14 trade year (July/June), the U.S. accounted for more than 50 percent of Brazil’s wheat imports, or more than 3.6 million metric tons. While the duty-free period and resulting surge in sales to Brazil did not continue through the next trade year, the U.S. has historically been the dominant non-Mercosur wheat exporter to Brazil.
Since 2008/09, the U.S. share of exports to Brazil has averaged about 13 percent with other non-Mercosur competition, supplying an average of about 3 percent of Brazil’s import needs. In 2017/18, during a recent period of unusually low Canadian wheat prices, exports of Canadian wheat to Brazil surpassed those from the U.S. This reversal emphasizes the fact that U.S. access to the Brazil market is a function of relative prices of the U.S. and export competitors.
Hard Red Winter (HRW) is the leading U.S. wheat class exported to Brazil. In the U.S. summer months, HRW wheat prices tend to decline and become more competitive with Argentinian wheat prices. If Argentine supplies are relatively tight, U.S. wheat prices can fall below Argentine prices.
In combination with relatively high-quality, such circumstances can be supportive of rising U.S. wheat exports to Brazil. However, the U.S. price advantage tends to decline when Argentinian wheat enters that harvest stage (indicated by vertical bars) and all but disappears when the 10 percent duty is in place.
When the spread between U.S.- and Argentinian-delivered wheat prices is largest, U.S. export volume to Brazil is minimal. As the spread narrows, U.S. exports to Brazil tend to increase. The removal of a 10 percent duty on non-Mercosur imports to Brazil will reduce the price spread between U.S. and Argentine wheat and is likely to enhance the competitive position of the U.S.
However, the benefit of the TRQ to U.S. wheat export concerns is limited by the volume allowed in duty-free under the TRQ, currently capped at less than 10 percent of projected total Brazilian imports for 2019/20. Competition from other non-Mercosur competitors—notably, Canada, but also Russia and the European Union; and formidable exportable supplies of Argentine wheat.
While production is affected by drought in 2019/20, Argentina is expected to harvest its second consecutive bumper crop of wheat. Despite these countervailing forces, the implementation of the TRQ is largely seen as favorable for U.S. wheat exports to Brazil, though the scope of the benefits is not yet clear.