Could Persistently High Global Wheat Stocks Trigger A Price Correction?

Includes: AGU, CF, MOS, POT
by: The Mays Report

By G C Mays

The USDA published its World Agricultural Supply and Demand Estimates Report on March 9th and global wheat ending stocks have tumbled by 3.5 million metric tons after rising by 3.1 million tons last month. This month's reduction is due in large part to ending stocks in China being reduced by 3.5 million tons as the country increased its estimates of domestic consumption. While ending stocks no longer sit at all-time highs, they are still within a mere 26 million bushels of that distinction. The last time global wheat stocks stood at these lofty levels the US farm price was between $2.48 and $2.65 per bushel.

This leaves investors with a few lingering questions. Why are global wheat stocks this high? Will the market see a sharp price correction in order to cut wheat stocks? How will such a price correction impact the earnings of fertilizer companies like Mosaic (NYSE:MOS), Potash Corp (NYSE:POT), Agrium (NYSE:AGU), & CF Industries (NYSE:CF)?

At 694 million metric tons, world wheat production estimates are higher than they have ever been before with about 6.5 percent more wheat being produced globally than last year. However, global demand has only increased by about 4.5 percent. Political and economic strife in Europe and Africa has meant fewer U.S. export sales to those continents. Exports to Europe are down 43 percent compared to last year due to the European debt crises.

Wheat Exports from US to EU27 through Mar 1 2012
(Click to enlarge)

Source: The Mays Report

With the U.K. and Netherlands being exceptions, many EU-27 countries have imported substantially less wheat from the U.S. than in the previous year. U.S. exports to Africa are also down. Continuing political strife on the continent has reduced exports to many countries including Egypt, Libya and Morocco.

Wheat Exports from US to Africa through Mar 1 2012
(Click to enlarge)

Source: The Mays Report

U.S. exports to Egypt have tumbled by 91 percent while neither Libya or Morocco has had a single metric ton imported from the U.S. in the current marketing year after accepting 104.9 and 282.8 thousand tons respectively, over the same period a year ago.

Compared to last year total U.S. exports to these continents are 3.9 million metric tons lower. If one assumes that the respective countries consumed all U.S. wheat imported into their countries, global ending stock estimates would be around 205.7 million metric tons, still high by historical standards but comfortably below all-time highs.

The USDA projects 2011/12 marketing year prices between $7.15 - $7.45 per bushel. However, wheat has not traded above $7 per bushel since September 14, 2011. During the 1998/99 and 1999/2000 marketing years when wheat stocks were last at these lofty levels the average EUR/USD exchange rate was roughly $1.0437. At a recent price of $1.3113 the US dollar has depreciated against the euro by about 26 percent since the good old days of parity while wheat prices, recently at $6.43 a bushel, have appreciated by more than 150 percent from an average price of about $2.57. over the 1998/99/2000 marketing years.

Higher oil prices should offer some cover for wheat prices as more farmers will use wheat for feed if corn follows crude oil prices higher as we head into the spring and summer driving season. Should higher oil & gasoline prices result in demand destruction, which we are already seeing the beginnings of, we could see wheat prices nose-dive and fertilizer companies have a solid but less profitable year.

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

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