A roller-coaster ride during the past month has seen the three U.S. wheat exchanges — Chicago, Kansas, and Minneapolis — hit new contract highs and then plunge dramatically in the face of political uncertainty. The market pullback is partly in response to the Libyan situation, which in reality does not materially change the grain fundamentals facing the market as we move through the second half of the crop year.
There are macro-economic impacts that may arise from the political uncertainty, but these factors are not anticipated to have a measurable impact on wheat demand or trade. The gap between Chicago and the other two exchanges widened in favor of Minneapolis and Kansas. This is representative of the relative tightness of higher quality and higher protein wheat in the world market. This will remain in place until the new crop harvest begins in earnest. Of course, the earliest harvest is most typically softer winter wheat varieties, which will not alleviate the shortage of quality or protein wheat in the world market place. Thus, world attention will be focused on the progress and condition of the U.S. hard red winter (HRW) crop as the prime indicator of the depth and degree of quality wheat availability in the early portion of the 2011-12 marketing year.
Early indications are that the HRW crop is in perilous condition. There has been a widespread drought across western Kansas, Texas, Oklahoma and Colorado. Early estimates that had called for 1-billion-plus-bushel HRW production have been scaled back by 20% to just above 800 million bushels. This is a favorable development for the commodities market. However the 2010-11 carry in supplies — 385 million bushels of HRW — were large to the point of burdensome and the aggressive export program has only resulted in a projected reduction to 309 million bushels at the close of the 2010-11 marketing year.
In contrast, the U.S. had 165 million bushels at the start of the 2007-08 marketing year and 138 million bushels at its conclusion. This is a telling sign that the U.S. has room to maneuver in both this year and next, despite the incremental export increases and gloomy 2011-12 HRW production prospects. The stocks situation may potentially play a role in cooling wheat markets as the U.S. marketing year winds down between now and the end of May.
Given its role as the world residual, U.S. stocks are an easy way to keep track of the general sentiment of the futures markets. Tightening U.S. stocks are going to be a positive factor whilst widening stocks a negative to the world wheat price complex. The world situation remains relatively abundant with ending stocks projected at 177.8 million tonnes — the second highest level since 2001-02. This factor will probably relegate wheat from market leadership in the remaining months of the 2010-11 marketing year unless weather related problems continue to threaten 2011-12 production.
Durum supplies continue to tighten as the 2010-11 crop year starts to wind down. Of the three major exporters — Canada, the E.U., and the U.S. — two are projected to have significantly declining durum stocks year on year. Canadian durum ending stocks are essentially going to be reduced by two-thirds from 2.7 million tonnes to 903,000 tonnes. E.U. stocks are falling by one-quarter from 2.1 million tonnes to 1.5 million tonnes in 2010-11. The U.S. is the exception, with durum stocks increasing by 300,000 tonnes year on year. The U.S. situation is unique and largely motivated by quality issues, reluctant farmer marketing and large production.
Demand remains to be covered in 2010-11. Thus far the turmoil across North Africa and the Middle East has had neither a positive or negative effect on durum demand. In fact, a more significant factor is the relatively good production prospects in North Africa. It remains to be seen how much durum can be pulled out of the northern U.S. durum growing region and in the meantime Canada and the E.U. will continue to play the pivotal role in satisfying outstanding demand. However, the more demand can be pushed toward the spring, the greater availability of Mexican and U.S. desert durum. Typically desert durum offers relatively good quality, but otherwise the world will remain relatively bereft of quality durum due to the production issues in Canada and the northern tier U.S. in 2010.
Now that all of the major barley exporters have finished their harvests for 2010-11, the market can focus on the demand-side of the equation. For feed barley, recent slow offshore demand has moved the global market lower as the largest buyer, Saudi Arabia, remains on the sidelines. Recent trades have been light and tonnages are small. It will take Saudi Arabia to begin a new round of purchases to drive world prices up. Trade estimates show that Saudi Arabia's buying interest, although delayed, may result in a sizeable amount of purchases before the end of the 2010-11 marketing year. Conversely feed barley prices in Western Canada have strengthened on tightening western Canadian stocks, significantly narrowing the price gap to world prices. The opportunity for additional sales of western Canadian feed barley into international markets will, as always, depend on the relationship between Canadian domestic prices and world prices.
