LAST week’s pivotal World Agriculture Supply and Demand Estimate (WASDE) report from the US Department of Agriculture caused shock within the international grains industry, with a mark-up in production across the globe out of line with trade expectations.
In the wake of the report, US futures prices for three major crop types, corn, wheat and soybeans plummeted around 4 per cent.
Even allowing for a recovery following the rally, primarily led by scepticism surrounding the USDA numbers, wheat has now given up nearly all of its early July gains.
Australian wheat futures on the ASX exchange were at $260 a tonne, down more than $40/t on highs set in July, but still sit substantially higher than international parity.
The major surprises in the WASDE report came from data around the Russian and Black Sea crops, which were revised sharply higher.
The USDA now has the Russian wheat crop at 77.5 million tonnes, or 5mt over last year’s record crop.
Lachie Stevens, managing director at Lachstock Consulting, said traditionally the August WASDE report was subject to a reasonable amount of variance due to the state of development of northern hemisphere crops.
The August report is the first USDA report to be based on field conditions rather than historical data and weather outlooks.
“In general the numbers that came out were a little higher than what people expected, given the variance in the past combined with conjecture on the methodology and the increased focus on satellite imagery, the market has been a little sceptical,” Mr Stevens said.
The report has also been questioned for not taking into account the large amount of abandoned acres of spring wheat in the northern US, leaving harvested area the same in spite of the high profile crop failure in the region.
Cheryl Kalisch Gordon, Rabobank senior grains analyst, said another reason the market had not gone down as far as could be expected given the production figures was so high was the boost in consumption.
“Consumption is up, there is increased demand for grain from Russia and Indonesia among other big grain users,” Ms Kalisch Gordon said.
She also felt much of the boost in supply had already been priced into the market.
“We’d seen prices steadily falling from their early July highs well before the report came out,” she said.
Ms Kalisch Gordon said the WASDE report could be seen as slightly supportive of higher protein wheat, such as what Australia normally produces.
“Russia will be the fourth biggest wheat producer in the world for the second year running and for the first time it looks like being the biggest exporter.”
“Generally it produces lower quality wheat so the demand for higher quality grain may not necessarily be met from there.”
However, she cautioned a flood of low cost Russian exports on the market would limit the upside for all categories of wheat.
A weak rouble will mean Russia is likely to be a major player into almost all wheat markets this year, with potential logistics issues the only potential constraint.
Other Black Sea / former Soviet Union (FSU) producers are also in line for a good season, with Ukrainian and Kazakh wheat production also boosted in the WASDE report, meaning a total lift in wheat production of 9mt from the previous report.
The USDA made modest cuts to projected wheat production in both the US and the EU, in line with dry conditions, but left its forecast for Australia unchanged at 23.5mt, well above the figures quoted by private forecasters.
Mr Stevens said many Australian forecasters had estimates of between 21-22mt.
He said August rain had meant improvements in crop condition in previously dry parts of South Australia, such as the Eyre Peninsula and northern WA.
“All things equal the rain we have had now will probably get us through to the end of the month without any significant reduction in that number unless conditions get unseasonably hot in the areas lacking moisture,” he said.