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Wheat futures: Demand steady with lower supplies
CHICAGO (OsterDowJones)--Solid demand and lower world supplies are seen keeping the U.S. Wheat futures market propped up in the first quarter of 2004. Still, current availability of ample U.S. Wheat stocks and harvesting of the Australian and Argentine Wheat crops is seen limiting any nearby bullish explosions, analysts said.
"We should have solid underlying support going into the first quarter of 2004," said Shawn McCambridge of Prudential Securities in Chicago, citing adequate demand potential.
During the first half of the 2003-04 marketing year, U.S. demand has been boosted by supply shortages in Europe and the former Soviet Union. This has combined with a drop in the value of the U.S. dollar versus other major world currencies, including a recent record low against the euro.
At 27 weeks into the 2003-04 marketing year, U.S. Wheat export sales are running 30 percent ahead of last year's pace and the number of Wheat shipments inspected for export is running 21 percent ahead of the previous year's pace.
Last year, the Wheat market deteriorated significantly amid aggressive marketing from France and Ukraine, which surfaced in the face of production drops in major exporters such as Australia, U.S. and Canada. But analysts said the 2003-04 season has brought on almost an opposite export scenario.
After France, Ukraine and Russia displaced U.S. Wheat sales into Egypt last season, the U.S. has returned to recapture that market share. At the midway point into the current marketing year, U.S. sales into Egypt are running nearly threefold more than those for the same time last year.
Amid the short Wheat supplies in Europe and the former Soviet Union, the U.S. has sold Wheat to some less traditional buyers such as Armenia and Romania. Sales have also increased into countries such as Italy, Spain, Morocco and Nigeria. In addition, China has stepped up to purchase U.S. Wheat lately. Still some analysts say they think the business could have been politically motivated and speculate limited near-term Chinese buying.
Jerry Gidel of North American Risk Management Inc. in Chicago contends that if China was to buy 1.0 million to 1.5 million metric tons of U.S. Wheat that it could push Mar Chicago Board of Trade Wheat values into the $4.25-$4.35 per bushel range. In early December, CBOT Mar Wheat tagged a contract high at $4.21 1/2.
Gidel holds that 35 million to 50 million bushels in Chinese business could still be accommodated without dramatically tightening U.S. ending stocks. "Overall, U.S. Wheat supplies remain quite adequate with our carryover supplies (potentially) at 570 (million) to 580 million bushels versus last year's 492 million," Gidel said.
Possible seasonal peak in mid-January
"Typically the seasonal high for soft red winter Wheat is in January," said Sid Love of Kropf & Love Consulting in Overland Park, Kan. Analysts contend that this is traditionally the case as it coincides with Australia and Argentina moving their newly harvested Wheat into the supply pipeline.
While this wasn't the case in January 2003, a seasonal peak was clearly seen in January 2002, 2001 and 2000.
Moving into 2004, even though late-season dryness cut Argentine Wheat output, Australia is still expected to reap a near record-large Wheat crop.
Traders also point to a potentially bullish roadblock coming in by the way of the U.S. Department of Agriculture's quarterly grain stocks, supply and demand and winter Wheat seedings reports scheduled to be released Jan. 12.
Some analysts look for feed use to come down after an aggressive first quarter feeding figure was shown in the Sept. 1 grain stocks report, especially with this year's comparatively low corn prices.
"Higher SRW Wheat stocks will take some fun from the bulls," said Love. "We are not going to export as much SRW Wheat as we think," he added, pointing to concerns over the high amount of vomitoxin Wheat in this year's SRW Wheat crop.
Love also points to sufficient supplies of SRW Wheat in deliverable positions in Toledo, Ohio, and said Wheat with comparatively high vomitoxin levels can be delivered against the CBOT contracts verses levels accepted by exporters and millers.
Some analysts also point to an increase of soft Wheat coming over from Ontario after a record crop was recorded in the Canadian province this year, which should displace some SRW Wheat needs. While the U.S. has placed import tariffs on Canadian spring Wheat this year, none are in place for soft wheat.
Due to this year's tighter SRW Wheat supplies compared to the other Wheat classes, CBOT SRW Wheat futures have recently been trading at a premium to both the higher quality hard Wheat classes traded at the Kansas City Board of Trade and the Minneapolis Grain Exchange.
The ability of KCBT hard red winter Wheat futures to return to a premium to the CBOT will depend on demand and HRW Wheat conditions, analysts said.
Tom Leffler of Leffler Commodities in Augusta, Kan., said although HRW Wheat demand has improved, the HRW Wheat class has the supplies to fill more exports. But, he said, fall HRW Wheat conditions are down from last year.
"You can't make or break the crop in the winter," said Leffler, who added that emergence problems in the western producing areas this fall will make for increased nervousness as the market watches to see how the crop emerges from dormancy in the spring.
Most analysts agree that an increase in winter Wheat acreage should be seen this season following the improved prices and record Wheat yields in 2003.
Love estimates that overall HRW Wheat seedings could be up 500,000 acres in 2004-05. In 2003-04, HRW Wheat acreage rebounded 7 percent from 2002-03 while SRW Wheat acreage declined slightly.
World productions also seen rebounding
The severe crop problems in the European Union, eastern Europe and the former Soviet Union drew down world production to about 548 million metric tons in 2003-04, which came after the 2002-03 season when hefty crop reductions were seen in the U.S., Canada and Australia and reduced output to 566 million. Thus, analysts are looking for world Wheat production to rebound to a more normal level near 580 million tons, which was last seen in 2001-02.
Analysts point out that a boost in world production is needed as world consumption has outpaced production in recent years and drawn down world Wheat stocks. As of December, the USDA projected 2003-04 world Wheat stocks at 127.9 million tons, down from nearly 200 million just two seasons prior.
Date: 1/8/04
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