I haven't touched on the wheat market in a few weeks and thought it might be a good time to revisit the situation and see if there are any major changes. The wheat markets, as we all know, turned strong in late July and August due to a drought in the Black Sea countries, most notably in Russia.

Production in Russia for 2010-11, according to USDA's attache in Moscow, is expected to be 41 million tons, 4 million tons below USDA's latest estimate and down 20.7 million tons from last year. The ongoing harvest is revealing poor yields and quality.

USDA's August supply and demand report showed world wheat production for 2010/11 down 15.3 million tons, following a 16.7-million-ton projected drop in foreign production that more than offset a 1.3-million-ton increase in U.S. wheat output. Foreign wheat production projected for 2010/11 was reduced in August to 584.1 million tons, 35.9 million tons below last year's record of 620.0 million tons for foreign wheat output. Major reductions in production were made for three main FSU-12 wheat producers, Russia, Ukraine and Kazakhstan, and for the EU-27. These reductions were partly offset by higher projected output in the U.S., Australia, India and several other countries. Recently, Australian production has come into question with western wheat producing areas in the nation suffering dryness. Argentina is also suffering from a dry spell that could reduce area sown to wheat.

Reduced world production naturally affects the demand side of the market, and that was noted in reduced estimates for world wheat imports and exports. Tighter supplies and higher prices are expected to reduce projected global consumption. Imports are projected 5.7 million tons lower as higher prices will reduce demand in a number of countries. Exports were lowered 12.0 million tons for Russia, partly reflecting the announcement banning exports through December, but also because they will need to feed much of their wheat production to livestock. Traders world-wide are expecting Russia to import grain in the coming year to make up for crop losses, but an official statement from the Russian prime minister says otherwise. Other FSU-12 countries will also be limiting exports due to production issues.

Higher exports from other countries, in particular the U.S., will partially offset FSU-12 declines. Global ending stocks were projected 12.3 million tons lower at 174.8 million tons, 49.9 million tons higher than in 2007/08 when prices soared to record levels. September's USDA supply and demand report is expected to bring further reductions in FSU-12 production and exports, which should help support firm U.S. wheat prices and basis levels.

The sharp declines in world wheat production have really helped U.S. wheat prices. Export demand is strong and futures prices have rallied. Wheat futures prices reached a pinnacle in early August and have since settled back into a more comfortable trading range. Demand for U.S. wheat continues to grow and will likely reach a plateau soon and remain there for most of the crop year. The U.S. wheat that is in demand is mid- to high-protein wheat, primarily hard red winter wheat and hard red spring wheat, used for making bread. Another class of wheat prevalent in the U.S. is soft red winter wheat, which has low protein content and is used in making cookies, crackers and pastries. It is also used at times as a substitute for corn in livestock feed. Export demand for this class of wheat is weak as wheat of comparable quality is available worldwide and is usually cheaper.

Export demand for the different classes of wheat is right on target with USDA estimates. USDA, in the August supply and demand report, raised exports 200 million bushels to 1.2 billion bushels for all wheat. For the major classes of wheat, HRW and spring wheat were raised while SRW wheat was lowered. So far, that is exactly how demand is working out. Hard red winter wheat exports were raised to 545 million bushels, up 120 mb from last year; hard red spring wheat exports were increased to 340 mb, up 100 mb from the previous crop year; and soft red winter wheat exports were lowered to 100 mb, down 20 mb from last year.

The potential is there to meet these goals. The wheat is available, but will demand hang on? For hard red winter wheat, the outlook is positive and demand is expected to be strong throughout the crop year. The surprise here is importers that were sourcing wheat from the FSU seem to be looking for higher-quality wheat than they were getting. Spring wheat looked positive to start the crop year, but much of that was based on lower production from Canada. Recent reports indicate that Canadian production may not be as low as originally thought, and if that turns out to be the case, it could put a dent in spring wheat demand. Soft red winter wheat demand is flat with little on the horizon. Given current demand, it would appear to be quite a feat to meet the 100-million-bushel goal. There is plenty of wheat of comparable quality available in the world, which means if demand for this class of wheat is to improve, it will likely show up later in the crop year.

As far as basis is concerned, HRW basis levels will likely continue to strengthen on strong export demand with volatility a possible issue. Spring wheat basis values look to be steady to firm, especially if Canadian wheat production is better than expected. If it is not, U.S. spring wheat basis values could be quite strong depending on demand. SRW basis values have been improving while demand remains lackluster. The reason basis levels are firming is because of the convergence issue and variable storage rates that have caused futures spreads to strengthen. The incentive is strong to store wheat, so in order to pull wheat out of storage for use in the cash markets, futures and basis values have to increase.

Bob Bailey can be contacted at bob.bailey@telventdtn.com

(AG/KM)

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