Summary
More than adequate supplies of USA wheat are likely to create golden opportunities for the USA end user market.
Key world players stocks to use levels limit price incentives for expanded acres for the 2010 summer harvest.
Analysis
Without any doubt, the biggest surprise contained within the October 9th, USDA World Agriculture Supply and Demand Estimates report was contained within the wheat sector. Though much of the futures and cash industry was anticipating increasing yield and crop production for both corn and soybeans and the USDA delivered upon the anticipation with a potential record soybean and second largest ever corn crop, the USDA did shock the wheat trade with an end stocks to use level of 40.7%. This projected level compares to a year earlier level of 28.9%, five year average level of 23.02% and Allendale Inc would need to venture back to 1987 to find a larger percentage of 47%.
The most significant reason for the increase from the September WASDE value of 33.5% came many fold as USDA trimmed USA wheat exports which typically account for 40-49% of annual usage as well reduced wheat for feed usage by 19.2%. Another avenue to explore just how large present USA wheat stocks are is by calculating the per day use of wheat within the USA and after the marketing year is complete, how many days of supply the USA holds as a cushion if there are unforeseen potential new supply problems.
As you are able to view via this graph you will find the present days of wheat supply of 148, representing 40% of one years use. Astonishing is the fact the present days supply represents the largest cushion dating back to the 1999-2000 marketing year and is more than three times greater than just two years ago of record level lows of just a mere 48 days.
Looking at the global status of wheat, the present end stocks to use are estimated at 24.2% vs year earlier levels of 21.4%, five year average of 19.3% and we would need to venture back to 2001 to find larger levels of 29.2%. The world is awash in wheat, with China leading the charge with its 58% end stocks to use, the USA’s 40.7%, India’s 22% (despite its less than stellar 2009 monsoon season) and the FSU-12’s 17%.
Those which are most likely to benefit from the extreme supply may be wheat processing companies such as the American Italian Pasta Company, Barilla Holding and New World Pasta Company. Also consider those companies which are benefiting from storing wheat stocks as the CBOT futures market is offering nearly twice the level of needed carry. Those companies include Archer Daniels Midland Co, The Andersons Inc, Bunge Ltd and privately held Cargill.
On the losing end of the large stocks of wheat no doubt will be the farmers as cash prices for old crop supplies are weakening and new crop bids are not creating an incentive to plant new crop supplies for 2010. Allendale Inc strongly suggest wheat farmers will plant less winter wheat in the Fall of 2009 and those companies most directly impacted are likely to include seed and fertilizer companies.Joe Victor consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
