Wheat: Growth With Constraints

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Includes: WEET
by: Oleh Kombaiev

Summary

The USDA has lowered its global 16/17 wheat ending stocks forecast mostly because of India.

The weather in the United States continues to be unfavorable for the future wheat harvest.

Record wheat stocks in the United States will prevent a sharp rise in the wheat price.

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Frankly speaking, as an author of the series of articles with a positive outlook for wheat, I love to watch what is happening now in this market. But I'd love even more to find out what's next.

Let's start with the changes in the USDA forecast.

The February WASDE report has definitely surprised the market. The 16/17 wheat ending stocks forecast has been lowered immediately by 4.68 million tons to the level of 248.61 million tons, which is 1.8% lower than the average expectations of analysts.

The key reason for such a drastic change in the USDA forecast is India. The country's wheat production forecast has been reduced to 87 (-3) million tons in the current season. As a result, the ending stocks forecast has been also was lowered to 8 (-3) million tons, which corresponds to the nine-year minimum.

The ratio of the projected wheat ending stocks in India and the volume of domestic consumption in 16/17 is approaching the multi-year low, indicating increasing chances of the deficit. Although the USDA has not changed the forecasted volume of Indian wheat imports, it is very likely to do it soon.

The U.S. wheat ending stocks projections for the current season has been reduced to the level of 31.01 (-1.28) million tons, which is also below the average expectations of the analysts. The changes have occurred due to the increased export forecast.

It is worth noting that the U.S. wheat export is objectively going at a good pace. The new final export forecast with regard to the outstanding sales is currently accomplished by 83.92%, which corresponds to the average level over the past five years. It is to be hoped that the observed price growth will not dampen the future sales activity.

However, it is worth noting that the outstanding sales for the next marketing year, are not very active. In fact, they are the lowest over the past five years. I.e. there is no feverish demand for wheat.

Summing up the changes in the USDA forecasted figures, I would like to note that, although the ratio of the predicted U.S. wheat ending stocks and the forecasted volume of consumption and exports has decreased over the past month, it still remains at the multi-year highs. It rubs in the fact that the enormous stocks of the old crop wheat still need to be sold.

By the way, if we try to predict the wheat price based on the above mentioned ratio, we'll find out that the current May wheat (CBOT) futures price almost matches the balanced level.

One always should talk about the wheat market with reference to the weather.

In Russia, the beginning of the year was characterized by extremely cold weather. But, at least at the moment, according to the officials, there are no serious concerns about the state of winter crops. The nearest forecast indicates that the agrometeorological conditions for the winter crops will be mostly satisfactory till the end of February.

In Ukraine, as of February 13, about 85% of the winter crops planted area is reported to be in good and satisfactory condition.

As for Europe, I haven't heard about any big problems.

In the meantime, the key U.S. wheat growing regions are affected by drought. Also, it is worth recalling that in January the cold temperatures threatened crops due to lack of snow cover. So far, in general, the weather conditions are unfavorable for the future wheat crops in the United States. But good weather in spring is still able to get it right.

The technical picture of the market has improved. The May wheat futures price has now reached the key resistance level of $4.70 and will probably stay at this level for some time.

PUTTING IT ALL TOGETHER

In total, an ascending channel has emerged distinctly enough in the wheat market, and I think the price is likely to continue growing towards $5 in the next two months. The spring weather risks will support this process. But it should not be forgotten, that the record U.S. wheat stocks are still there, so don't expect soaring prices.

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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