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Wednesday, July 13, 2016

Catch 22 in WASDE Report

By Andrew Whitelaw  |  Source: USDA

Key points

  • The Australian wheat crop was increased by 2% to 25.5mmt
  • Australian beginning stocks for 2016/17 have been increased by 19% to 5.86mmt.
  • Wheat consumption for feed is projected to increase due to price attractiveness versus corn.
  • Canadian canola production was increased and French rapeseed was decreased.

2016-07-13 CATCH 22 IN WASDE FIG 1

2016-07-13 CATCH 22 IN WASDE FIG 2

2016-07-13 CATCH 22 IN WASDE FIG 3

Overnight the USDA released the World Agricultural Supply and Demand Estimates (WASDE) for July. The report provided some surprises which helped lift futures prices. Is this the start of a longer recovery in grain prices or is there a catch in the report?

Crop forecasts, like any other forecasts, are just a prediction. Therefore, it’s worthwhile reading our article published yesterday asking ‘Are crop forecasts a load of old bulltish?’ to keep some perspective when reading forecast reports.

The report released overnight was surprisingly bullish, with the majority of analysts expecting a benign to bearish report. Hence why the market reacted quite strongly, albeit still sitting at ten year lows.

When we look at the change month on month wheat production has been lifted by 1.05%. However, this has been offset by higher consumption resulting in end stocks falling 1.6% to 253.7mmt (figure 1). This is great, although it has to be taken into account that 253.7mmt in global ending stocks will still be by far the highest on record. In addition, when we look holistically at all grains (figure 2) it is clear that we are in a fourth year of high grains production.

The extra wheat consumption has arisen from increased feed usage, due to price attractiveness when compared with corn. We could think of this as a positive. However, in order for these end stock projections to be realised wheat prices will have to remain low in order to remain an attractive feeding proposition otherwise end stocks will increase again.

At a local level the Australian crop was increased by 2% to 25.5mmt largely in line with ABARES predictions from Mid June. In an interesting move, beginning stocks have been substantially increased from 4.93mmt to 5.86mmt a rise of 19%. This additional tonnage is symptomatic of the reduction of competitiveness of Australian wheat.

Soybeans rose 3% overnight, on the back of increased export and domestic consumption in spite of an increase in US production. Overall the major oilseed production for this year was increased 2.58mmt with the stock to use ratio still at a tight 14% (figure 3). In Canola production was increased for Canada, however was largely offset by reduced yields in France due to excess rain.

What does this mean?

The reduction in end stocks was overall bullish for wheat, however there is a catch. In order for these projections to be realised wheat has to remain at low pricing levels to be competitive for feeding, so in effect it is bullish for stocks but potentially bearish for pricing.

At the moment the world is still going to be sitting on historically high wheat stocks, therefore we are not positive for prices in the coming 6 months unless there is a black swan event.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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