Supply and Demand Balance Improves

March 9, 2013 08:30 AM
Supply and Demand Balance Improves

Drought and livestock feed use strengthens prices

Feeding of wheat by livestock producers remains strong while persistent drought in the Great Plains continues to threaten prospects for the nation’s hard winter wheat crop. So why are wheat prices falling? The projected world wheat crop is larger than expected and exports out of the Ukraine are also expected to increase.

"With a decent wheat crop, we don’t need to have wheat prices at this level," says Jerrod Kitt, director of research, Linn Group, in Chicago. Currently, he says, the price momentum for wheat is to the downside.

Domestic issues center stage. Looking first at the domestic numbers, USDA’s World Agricultural Supply and Demand Estimates (WASDE), released Feb. 8, showed lower U.S. wheat ending stocks for the 2012-13 crop year. USDA cut ending stocks by 25 million bushels to 691 million bushels due to higher feed and residual use, as low wheat prices relative to corn continue to attract buyers in the livestock sector.

"Wheat is working pretty good in western feed rations, primarily for cattle," Kitt says. "U.S. soft red winter wheat is the cheapest in the world, no doubt about it." Yet despite low prices, export sales have been disappointing.

Drought continues to be a major concern in the hard red winter wheat-growing region of the Great Plains, but that doesn’t mean the region will have a poor wheat crop. "With good spring rains, we could get a good crop," Kitt says.

According to the latest U.S. Drought Monitor, severe to exceptional drought still blankets Nebraska, Kansas, and Oklahoma, and the vast majority of South Dakota.

The eastern soft red winter wheat crop, however, entered dormancy in good condition despite early concerns about lack of snow cover. "The plant was so bushy that it sort of formed its own ‘snow cover,’" Kitt notes.

USDA narrowed its projected U.S. seasonal-average farm price for wheat by 5¢ on both the low and the high end of the range to $7.70 to $8.10 per bushel. Analysts expect these prices to continue to weaken, particularly if USDA does not reduce its forecast for world wheat production.

Global supplies unchanged. USDA left global wheat supplies for 2012-13 nearly unchanged—despite expected declines in Argentina.

USDA lowered projected global wheat production by only 0.7 million metric tons to 653.61 million metric tons. Global wheat consumption was also virtually unchanged at 673.43 million metric tons. However, global consumption is projected to be 24.6 million tons lighter in 2012-13, compared with the 2011-12 crop year, as feed use for livestock moderates.

"I was disappointed that USDA didn’t true up the world stats," Kitt explains. "I expected USDA to take 1 million to 2 million metric tons out of Argentina." USDA left Argentina’s projected wheat production unchanged at 11 million metric tons.

"Most of the private trade expects a wheat crop in Argentina of 9 million to 10 million tons," Kitt says.

World wheat ending stocks for the 2012-13 crop year were also basically unchanged at 176.7 million tons. Lower projected ending stocks in the U.S. and Morocco offset higher stocks in Iran, South Korea and Ukraine.

For more coverage and analysis of USDA reports, visit

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