Looking around the marketplace, the year 2017 is appearing very similar to 2016. Minor weather scares early in the spring helped to support prices. That is, before favorable weather and larger than expected yield estimates quickly threw a wet blanket on the markets as they retreated back below profitable levels. However, there has been one market that caught on fire for a period of time and with good reason to do so.
Hard Red Spring wheat finished the 2016/17 market year with substantial 41.04% stocks to use ratio and leaving end users with very little to worry about when procuring grain needs. This rather large supply of spring wheat helped push all spring wheat planted acreage lower to start the 2017 year. Dropping 706,000 acres from 2016 to 2017, spring wheat was able to capture a rather strong fear driven bull run during the summer months as severe drought conditions set in across the upper plains.
North Dakota alone accounts for 48% of total spring wheat—while North Dakota, South Dakota, Montana and Minnesota combined will account for 90% of total US acreage! Given the fact that regions of these states were ravaged by drought, seeing the Minneapolis December contract fade from a July high of 843’0 to its current 622’2 has been disappointing and very concerning for producers suffering from a production shortfall. However, there is a reason to not give up on this market yet.
The September WASDE report offered little insight but did come across with a bearish bias as the USDA trimmed exports by 10 million bushels and raised imports by 5 million bushels for an overall increase in supply by 15 million bushels; pushing ending stocks up to 146 million. This demand reduction in the September WASDE report was proceeded by a July demand reduction domestically by 5 million and exports by 20 million; helping to stimulate the selloff mid-summer as price rationing began to take effect.
Falling demand estimates matched with falling prices leaves little to work with, but this market season isn’t over yet as the Small Grains Summary is just around the corner. Through the marketing year, the USDA has been reluctant to make much for changes on the supply side of the balance sheet.
Starting the marketing season with an estimated yield of 39.0 bushels per acre, the USDA has since lowered that only to 36.9 currently. That’s well below last year’s 46.2 and the five-year average of 45.7 but still beating the 2006/07 yield of 32.2 and in line with 2007/08’s yield of 36.3; with abandonment rates of 6.96% and 2.59%, respectively. Which raises the question now of abandoned acres this year as the USDA remains at a 3.71% abandonment rate vs the five-year average of 2.2%.
Increasing abandonment to 8.36% for a harvestable acreage of 9.4 million, ending stocks fall 18 million to 129 million bushels; stocks to use a ratio of 24.4%; well below the 2016/17’s ratio of 41.04% and the five-year average of 37.49%. Still plenty large enough to make it hard to challenge recent market highs but yet low enough to keep some end users concerned going forward as production issues keep popping up around the world; specifically Canada which too struggled with drought in key wheat regions.
As demand estimates have continued to slide through the year as prices rallied, it is possible that any demand damage has already been done and accounted for by the market and USDA. This leaves mostly just the supply side to be revised down the road. Potential increases to abandonment and potential decreases in yield are both supportive to the market plus the likeliness that spring wheat will need to buy acres this coming spring as the September 2018 contract is trading at only 629’0 today; not much incentive to increase acres in 2018.
The market remains in a limbo as we wait for the Small Grains Summary on September 29th and may have some downside technical objectives to achieve before a recovery can happen. However, the outlook is supportive.
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