USDA wheat market forecast for 2016/17 proved to be hardly predictable. The global ending stocks of wheat in 2015/16 and 2016/17 are evaluated at the level exceeding the upper bounds in the expectations of analysts.
Source: ADM Investor Services
Despite the forecasted wheat production decline of 1% YOY in 2016/17 (-7.1 million tons) to 727 million tons, taking into account the total volume of the world carryovers, the wheat supply will increase by 2% YOY. At that, the wheat consumption will grow by only 0.7% YOY in the new season. Meanwhile, the global export forecast in 2016/17 suggests a decline of 1.8% YOY (-3 million tons). As a result, the ending stocks will reach 257.3 million tons (+5.9% YOY) and establish a new historic maximum.
The stock to use ratio, the value of which is now projected at 36.1%, gives more accurate idea of how "bearish" will be the global wheat supply and demand balance in the new season. This is the highest indicator since 1999.
With respect to the likely wheat futures price in the new season, the current value of stock to use ratio assumes the average wheat price level at about $4.5 per bushel.
Perhaps, however, the situation is not as hopeless as it seems.
China is the largest producer and consumer of wheat in the world. More than 45% of the global wheat stocks are in China. Therefore, the internal structure of the grain balance in China significantly affects the global indicators.
Chinese protectionism of the local wheat producers, aimed at avoiding the bankruptcy of the numerous small farmers, resulted in the situation where the volume of the accumulated stock of wheat in 2016/17 for the first time will exceed the volume of annual consumption. This is a huge amount of wheat and, frankly speaking, I do not understand the economic efficiency of this record. However, USDA does not expect that China will begin an active export in the new season. In 2015/16, China exported 1 million tons of wheat and the forecast for 2016/17 assumes a similar figure.
Given that China does not actively participate in the global trade, the world wheat balance should be assessed without regard to the impact of this country. I have calculated stock to use ratio excluding China and got the following results:
As you can see, the value of the stock to use ratio without China in 2016/17 falls below the level of 2015/14 and 2014/15. If we abandon the assumption that China will begin the export of wheat in this season, this indicates that the fair market price of wheat in 2016/17 should not be lower than the price level of the previous two years.
Wheat is negative now, which is reflected by the large short position of funds. The wheat crop condition in the United States is one of the best at least over the past ten years, and it also overhangs the market.
Intuitively, and taking into account the technical analysis of the market, I believe that in the coming months the July CBOT wheat futures contract may fall to the level of $ 4.40, updating the long-term minimum. However, I am not confident that the price will go lower.
Unless otherwise noted, all charts included are my own.
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