Seven months into the U.S. wheat marketing year, the actual performance versus the expectations of U.S. wheat demand and prices has been muted at best.
The marketing year started with optimism as hard red winter (HRW) wheat production declined by 88 MBU year-over-year, as planted acres declined to the lowest in modern history.
Further optimism emerged as Russian production declined by 555 MBU year-over-year, and EU production declined from 2017. The dominating thought was that global demand for protein will shift export business to the U.S., which would lower supplies and raise prices. Below, we offer a few reasons why this scenario has not developed.
FOB Spreads Favoring Russia Over HRW
Supported by a weak Russian ruble and the desire to own hard currency, wheat FOB spreads between Russian and Houston Gulf HRW has continually favored Russia. The FOB differential between the U.S. and Russia has perplexed many analysts as it was believed that exportable Russian wheat supplies were going to be low, and that the U.S. would win back export demand after a historic 2017/18 Russian wheat crop and export program. To date, this has not occurred as Russian exporters have been aggressively booking export business.
Registered Stocks Telling a Supply-Driven Story
Looking at the weekly exchange registered stocks, there is a reason that the HRW futures are trading at weak levels against SRW and HRS. Total HRW exchange stocks are at record levels while HRS and SRW continue to decline. While the carry structure helps keep HRW supplies “in the bin,” the lack of export volume continues to suppress the demand side of the equation making HRW a negative spot for the 2018/19 U.S. wheat program.
A strong U.S. dollar versus the Russian ruble combined with a 400 MBU carry-in of Russian wheat, which was the largest since 2011, continues to suppress HRW exports. Without a material change in the global protein related export structure to simulate demand for U.S. wheat, HRW should remain bearish compared to the other U.S. wheat classes as supplies remain accommodating.
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