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By G C Mays

The USDA published its World Agricultural Supply and Demand Estimates Report, and while ending stocks in the U.S. are lower, global ending stocks soared 3.1 million metric tons higher to what looks like an all-time high of 213.1 million metric tons.

Global Wheat Ending StocksSource: The Mays Report

In December, when global wheat stocks stood at multi-year highs and the EUR/USD exchange rate was highly correlated with wheat, there were serious concerns about a strengthening dollar lowering wheat prices and delaying purchases of fertilizer, which would place pressure on the earnings of fertilizer companies like Mosaic (NYSE:MOS), Potash Corp (NYSE:POT), & CF Industries (NYSE:CF), all of which had a strong correlation to the EUR/USD and the supply demand dynamics of wheat. However, since then wheat has decoupled from the EUR/USD.

Changes in Correlation between wheat and EUR/USDSource: The Mays Report

Drought conditions in South America focused everyone's attention on corn and soybean production. For a few weeks the only thing the market wanted to know was how wheat was trading relative to corn. The fertilizer companies have also decoupled from the euro and are trading with the S&P 500 for the moment.

Source: The Mays Report

A couple of weeks into January there was really nothing new coming out of South America, Greece's March refinancing deadline was still in the distance and the markets were beginning to become desensitized to European debt concerns. Once the market prices in all known industry specific news, stocks will begin to move with the crowd until a new catalyst emerges.

Global Ending Stocks

Production increases in N. Africa, India, Kazakhstan, and the Former Soviet Union (FSU-12) as well as higher estimates of beginning stocks in Kazakhstan, and the Former Soviet Union (FSU-12) are largely responsible for the increase in Global Ending Stocks.


Source: The Mays Report

If these ending stock estimates hold they will be the highest level of global ending stocks on record, which stretch back to 1974. The previous record was in the 1999-2000 growing season when ending stocks were 210.3 million metric tons.

Consumption

Also adding to record ending stocks are reductions in global wheat consumption. There has been a 1.0 million metric ton reduction in consumption estimates as India has reduced its estimates of use for food by 1.6 million metric tons. This reduction was partly offset by increased use in Argentina, Brazil, Russia and the US.

While spring drought conditions could threaten wheat crop yields in the US, conditions in the European Union, China, and the FSU-12 appear healthy. The US typically has only 6 - 12% of global ending stocks so lower ending stocks in the US may not support prices going forward.

If estimates of ending wheat stock levels stay this high for the rest of the season the stock prices of Mosaic, Potash Corp, and CF Industries could come under more pressure. However, if the US initiates another round of quantitative easing or the market continues to ignore debt problems in europe and the dollar continues to weaken this could give strong support to wheat prices.

Source: U.S. Ending Stocks Lower; Global Wheat Stocks At All-Time High