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Tuesday, January 16, 2018

The Americans have gone off wheat

By Andrew Whitelaw  |  Source: USDA, CFTC

Key points

  • On paper 48% of world wheat stocks are held in China.
  • Winter wheat acreage in the US is the lowest since 1909.
  • The trade has a very large net short in the wheat market. 

2018-01-16 GRAIN FIG 1

2018-01-16 GRAIN FIG 2

2018-01-16 GRAIN FIG 3

There could be the start of a glimmer of hope for grain pricing, with new US data released at the tail end of last week. In this article we examine the US plantings of wheat, where the wheat is and what the sentiment in the market is.

On Friday night the World Agricultural Supply and Demand Estimates (WASDE) was released by the USDA. In my weekly comment, I expressed that there were unlikely to be many surprises. This has largely been the case. The report has largely continued the bearish sentiment on wheat, with global stocks remaining record high.

The past five years of strong growth in production, has given us a glut which will not disappear overnight. However, it is worthwhile pointing out that world stocks are heavily weighted towards China. Figure 1 displays the world stocks, Chinese stocks and the percentage held in China. As we can see Chinese stocks have substantially expanded in recent years to 48% of all wheat held. These are levels not seen since the late 90’s. Questions do however remain:

  • How accurate are Chinese stock figures?
  • What condition are these stocks?
  • Are we ever likely to see this exported (not likely)?

This week, the US winter wheat planting figures were released. Area set to wheat this year has dropped to 32.6m acres, the lowest since 1909. In the US wheat acreage has been steadily declining, with higher gross margins achievable through corn and soybeans. The lack of profitability has left wheat to be grown in areas where alternative crops are not as viable.

Although the US is not as important for the wheat trade as it has been in the past, with the black sea being the biggest driver of pricing. However, a smaller acreage, leaves a poor buffer for any potential issues which may arise.

The commitment of traders report, is a weekly report produced by the US Commodity Futures Trading Commission. This report provides an insight into the sentiment of the market. The important data to examine is where the managed money has its funds. We look at the net position to see whether the trade is either bullish (positive) or bearish (negative). This can be seen in figure 3, where we can see that the market overall is net short (-135k contracts).

This shows us that the managed money is expecting the market to go lower, as they will profit when it comes to buy back their positions.

At present the market has a very short position, with these levels seen very few times during this decade. If the market starts to have bullish sentiment, then traders will have to buy back their positions in order to stop losses. This can lead to a speculative covering rally which can lead to very quick changes in pricing.

What does this mean?

We still have a long way to go in order to truly call this a positive market for producers, however there are some welcome signs.

The lack of much in the way of a US buffer in combination with a large net short, could see substantive changes if any bad news comes to the fore.

The key is to keep an eye on the northern hemisphere and see what hiccups transpire, and there always tends to be at least one. 

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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