Increase in Canadian Production Unusual in December WASDE Report
By Casey Chumrau, USW Market Analyst
USDA regularly adjusts wheat supply and demand estimates for Southern Hemisphere exporters this time of year as their harvests progress. So, it was unusual when the largest adjustment in December’s World Agricultural Supply and Demand Estimates (WASDE) report was for Canada, where the wheat harvest ended almost two months ago.
USDA added 4.3 million metric tons (MMT) to last month’s Canadian production estimate to meet Statistics Canada’s official assessment of 37.5 MMT. If accurate, that would beat the previous record of 32.1 MMT, set in 1990/91, by a considerable margin. The significant late-season adjustments to the production projections are partly the result of the first harvest without the Canadian Wheat Board monopoly, which previously controlled all wheat stocks. Another effect of the monopoly’s dissolution is that Canadian farmers near the U.S. boarder now have the option to sell to U.S. elevators. This is particularly important this year as the Canadian spring wheat crop protein average is well below normal and can compete with a relatively high-priced U.S. hard red winter (HRW) wheat. As a result, USDA expects the United States to import a record 4.4 MMT of wheat in 2013/14, mostly from Canada, compared to the five-year average of 3.1 MMT. A little known fact is that the United States has always been Canada’s top wheat export market and this year could account for nearly 17 percent of Canada’s expected 23.0 MMT in exports.
In another small surprise from the December WASDE report, USDA left its Argentine production forecast unchanged at 11.0 MMT, despite an Argentinean agricultural ministry projection of 8.5 MMT. The decision might hint at USDA’s level of confidence in the official projection. In November, the ministry said erroneous data collection led to an inaccurately low production forecast of 8.7 MMT. It did not release a correction and then lowered the estimate in December. Production of 11.0 MMT would be a 16 percent increase from last year’s 9.5 MMT but down from the five-year average of 13.0 MMT.
The size of the Argentine crop is an important factor in anticipating the level of exports its government might allow. The Argentinean government carefully controls the domestic wheat supply and only issues export permits when there is no risk of pushing domestic prices too high. Currently, USDA estimates Argentine exports at 4.5 MMT and domestic consumption at 6.0 MMT. If the actual production output is closer to the export estimate of 8.5 MMT, permits may be limited. Last year’s crop of 9.5 MMT was the lowest in nearly 20 years, followed by the lowest exports in 35 years. U.S. wheat farmers are watching the situation closely because U.S. exports have increased significantly to some of Argentina’s largest customers, especially Brazil, and the trend could continue with another disappointing year in Argentina.
For Australia, the other major South Hemisphere wheat exporter, USDA increased production estimates 1.0 MMT to 26.5 MMT. After severely dry conditions limited the crop size last year, timely and adequate rainfall is helping this year’s crop to exceed early expectations. If realized, production would be 18 percent larger than last year’s crop and the third largest of all time. There have been no reports of the quality issues that plagued the record crop in 2011/12. The optimistic outlook for Australia’s output has helped pressure world wheat prices recently.
USDA left projections mostly unchanged for the rest of the major wheat exporters, but still pushed the global production forecast to a record 711 MMT. USDA also increased record-setting world consumption by just 1.0 MMT to 704 MMT. The result is larger carryover stocks into 2014/15 of 183 MMT, up 4.3 MMT from last month’s projection and 4 percent greater than last year, but still 7 percent below the five-year average of 189 MMT.
Overall, USDA’s December WASDE report was quite bearish for wheat. The already ample supply of world wheat keeps growing, sending prices lower and creating excellent buying opportunities for customers. The United States is in great position to maintain the fast pace of exports seen so far this year. U.S. wheat farmers harvested another high quality crop, unlike some major competitors, proving once again that the United States is the world’s most reliable supplier year after year.