Wheat: The Bullish Potential Is Limited Now

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Summary

The USDA is increasing its global wheat ending stocks forecast for the fourth week in a row.

In 2017, the U.S. winter wheat crops declined by 10%, while the analysts were expecting a decrease of 5%.

The record wheat stocks in the United States limit the potential of the bullish market.

In January, the USDA has published three key wheat market reports. I would like to give you a brief analysis of each one of them.

WASDE

The January World Agricultural Supply and Demand Estimates report, in general, is negative for the wheat market. Despite the fact that the USDA slightly raised the global 16/17 wheat consumption and exports forecast, the global ending stocks forecast grew by 0.84 million tonnes, amounting to 253.3 million tons, which is close to the maximum border of the range of the analysts' expectations.

In the current season, the USDA has been revising the global wheat ending stocks forecast upwards for already 4 consecutive months, which reflects that demand is chronically lagging behind the supply in the global wheat market.

The USDA forecast for the U.S. wheat market is also negative. The domestic U.S. wheat consumption in 16/17 will amount to 33.99 million tons, which is 1.17 million tons lower than the December forecast and not much higher than the previous two years' level. It is noteworthy that the USDA has reduced the proportion of the wheat consumption for feeding purposes in the structure of domestic consumption. The relatively cheap wheat was supposed to replace corn in the cattle's feed ration, but this is not happening so far.

The 16/17 U.S. wheat ending stocks are currently estimated at the level of 32.29 million tons, which is a record value since 1980.

As you can see, judging from the latest USDA forecast, the balance of supply and demand in the wheat market is moving towards the supply in the world as a whole and in the United States in particular.

Grain Stocks Report

According to the USDA estimates, as of December 1, the U.S. wheat stocks in all positions totaled 2.07 billion bushels. Despite the fact that this is a record level at least for the last 10 years, the USDA forecast virtually coincided with the expectations of analysts. It can be concluded that, in general, the USDA estimates did not surprise the market, but once again reminded of the record wheat stocks that farmers still have to sell.

The U.S. winter wheat plantings

According to the first official USDA assessment, the overall winter wheat seeded area totaled 32.4 million. This is 10% lower than in 2016 and 1.756 million acres lower than the average analysts' expectations.

The current weather conditions cannot be called ideal for the U.S. winter wheat. Against this background, the decline in the planted areas even more increases the likelihood of a substantial reduction in the U.S. wheat harvest in 17/18.

All of these reports were published on January 12. On that day, the CBOT wheat trades were characterized by high volatility, but eventually closed with a growth of 1.7%. Therefore, it can be concluded that the information on the reduction of the planted areas outweighed the negative sides of the other reports.

Putting it all together

Those who read my posts, know that I believe in the positive wheat market forecasts. The January USDA figures have not changed my views, but now I can see that it is too early for a significant price rally in this market. We must not forget that, judging from the current trends, the world's wheat supply is still outstripping the demand, which is able to kill any significant price increase. Therefore, I believe that in a situation where the current U.S. wheat stock prices reach the record values, but, at the same time, there are prerequisites to the harvest reduction in 17/18, the wheat futures (CBOT) is able to rise to the level of $4.50, but further growth is unlikely so far.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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