When ending stocks for a commodity move significantly lower, you should expect a move toward higher prices. But not necessarily for wheat.
“Quantity determines the value of corn. Quality determines the value of wheat,” explained Tim Hannagan, a grain analyst with Alaron Trading.
In USDA's most recent supply estimates, USDA ending stocks for wheat were forecast at 358 million bushels, down from October's estimate of 371 million bushels and down from last year's 777 million bushels.”
Wheat prices have been on a general downward trend since that report, although there has been a lot of volatility in the market since mid-August.
Part of the problem is that there is just not enough quality protein wheat in the United States to meet export needs, according to Hannagan. “All the big wheat growers with quality milling wheat in storage are holding out. They want to sell to domestic users in the spring when they need it and stocks are tight.”
As a result, the only wheat available right now to be shipped is low-quality feed wheat that needs to be priced into the Asian market. To be competitive with that market means prices need to be around $3.63 to $3.70, December, according to Hannagan.
China will provide some stiff competition for low-quality wheat markets because it can ship it so cheaply, according to Hannagan. In addition, USDA recently made significant upward revisions in China's wheat stocks.
USDA is also projecting sizable increases in high-quality wheat production in competing countries in the European Union. In late November, the first-ever cargo of French wheat arrived in the United States. U.S. growers with high-quality wheat will be hard-pressed to find export markets, one reason they're focusing on the domestic market.
On the other hand, noted Hannagan, “The wheat market is like a raw nerve. Any demand at all that is not expected sends it flying. It's very sensitive.”
Along that line, “There's also a lot of talk about war wheat going to Egypt,” Hannagan said. “We saw an order last month and another one on Nov. 12. They are buying it to distribute to potentially hundreds of thousands of displaced refugees if fighting begins again there in the Middle East.”
Meanwhile the U.S. winter wheat crop is almost complete and faring well in the major wheat-growing areas, noted Hannagan. “The growers I've talked to say this is the best early emergence for the winter wheat crop in the last three years. The root system is deep, the stalks are firm, and will stand any harsh weather.
“We all know that we don't make, break or kill the crop until we break dormancy in March, April and May,” the analyst added. “But right now, this is a sturdy crop. The storms coming across the United States from El Niño look to bring ample moisture and snow cover to the western Plains this year. So we're off to a good start.”