Todd's Take

Closer Look at Wheat Supplies

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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The chart shows that commercials have consistently increased positions in the long side of Chicago wheat when prices fall below $5.00, a good indication of demand in spite of this year's poor export performance. (Source: DTN ProphetX)

We have all heard it said -- and I have repeated for a long time -- that wheat prices remain under bearish pressure because the world's wheat supplies are plentiful. Officially, USDA pegs ending stocks of world wheat at 227.30 million metric tons (8.35 billion bushels) in 2015-16 -- or 32% of annual use, the highest stocks-to-use ratio in 14 years. Yes, that is a lot of wheat, but you may be surprised to find out that wheat supplies are not as excessive as the official numbers initially sound.

First of all, wheat has its own definition of normal. Unlike ending stocks-to-use ratios for U.S. corn or soybeans that slip into single digits when supplies are tight, world wheat supplies have traditionally maintained a higher level. Stocking up on wheat supplies is a form of famine insurance for many countries.

Because of that, the average ending stocks-to-use ratio for world wheat over the past 30 years is 30%. The lowest the ratio ever got was 21% in 2007-08 when spot wheat prices spiked to $13.00 a bushel. Given wheat's history, the current 32% stocks-to-use ratio is not especially burdensome.

Next, consider that China and India hold 44% of the world's wheat supplies and neither country imports or exports enough to have much effect on world trade in 2015-16. Other importing nations like those in North Africa and the Middle East hold another 16% of world supplies and are not about to let those supplies go as they are dealing with drought.

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The only ending wheat stocks that could actually be considered surplus in 2015-16 are held by the top eight exporting nations and total 69.06 mmt (2.54 bb) by USDA estimates.* If we exclude the self-sufficient nations of China and India, the surplus represents 14% of the rest of the world's annual consumption. That surplus is comfortable enough in the current environment to keep buyers disinterested, but also small enough to quickly disappear should a weather problem arise in 2016.

Here in the U.S., wheat supplies feel especially bearish as export sales have been lost to Russia, Ukraine, and Europe -- three places that attracted sales, but also sacrificed substantial purchasing power to win those sales. U.S. ending wheat stocks may reach 50% of annual domestic use in 2015-16, the most in 29 years.

Of the eight exporters mentioned above, the U.S. is the largest holder of ending wheat supplies with 36% of the total and is also the only one that has not sacrificed its purchasing power. If no weather problems arise in 2016, U.S. wheat prices will remain under pressure, but should a problem occur, the U.S. is positioned best as most other exporters will be out of chips after selling their wheat in 2015 at currency-poor prices.

As bearish as the current scenario feels to U.S. producers now, it needs to be remembered that world supplies are not as plush as many might think. The world still needs wheat and prices below $5.00 still represent good long-term value. If you aren't so sure, just ask the commercials that have consistently been profiting from buying dips below $5.00 since the fall of 2014.

*The top eight exporters of wheat in order are: Europe, Russia, U.S., Canada, Australia, Ukraine, Kazakhstan, and Argentina. USDA's November WASDE report found at:

http://usda.mannlib.cornell.edu/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd on Twitter @ToddHultman1

(CZ/AG)

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Todd Hultman