CHICAGO: Corn has been hogging most of the headlines and trader attention in recent weeks as dry fields across key US farmland sparked concerns over potential crop problems over the remainder of the 2012 growing season.
But after much-needed rains finally alleviated many stressed US corn fields in recent days, the wheat market looks likely to take over some of the limelight as global wheat growers suffer dryness concerns of their own and import demand starts to pick up in key markets.
One of the major headwinds helping to keep wheat prices in check over the past year or so has been the abundant level of global inventories following a fairly friendly global growing season in 2011.
But enduring dryness in major growing and exporting regions such as the Black Sea and Australia in recent months has helped to reverse that build in global wheat stocks as we approach the halfway mark to the 2012 calendar year, and any additional weather threats will stand to further eat into overall supply projections.
Improving demand prospects have also helped to chip away at global wheat inventories, especially within the livestock feeding industry which capitalized on wheat's rare price discount to corn earlier this year by increasing the amount of feed-grade wheat contained in animal rations.
Due to the relatively high level of wheat inventories — coupled with the lag in crop inventory accounting — there has been only a limited acknowledgment thus far that higher feed consumption has served to draw on wheat stocks in recent months.
But over time, it is likely to become clear that wheat inventories — particularly in the US — did indeed decline during that spell of wheat's relative price cheapness to corn, which should serve to more solidly underpin wheat prices going forward.
As the second largest wheat producer in the world after the European Union, China rarely makes waves in the wheat import market. Indeed, in 2011, China's wheat import total of 2.5 million tons ranked 17 in the world, behind such nations as Yemen, Bangladesh and Iraq.
However, the country recently announced that it imported 556,603 metric tons during the month of May — its second monthly total above 500,000 tons so far this year — to suggest that this year's import demand pace could handily outstrip that seen in 2011 and potentially mark a new phase in China's presence in the grain arena.
Indeed, the country has imported more wheat than corn so far this year — and is already close to 80 percent of its 2011 wheat total — and is expected to remain a regular buyer of the grain going forward given the emergence of fungal disease across wheat growing areas in the South and amid continued strong feed grain demand across the country that helped push Chinese corn values to record levels earlier this year.
China's sudden and quite aggressive emergence as a serious wheat buyer is likely to set off alarm bells among other large wheat buyers — notably Egypt and Indonesia, but also likely Japan, Morocco and Algeria — as few traders will want to get sucked into a bidding war with China should any further global crop supply concerns emerge.
And with world No. 3 wheat grower India suffering a dry start to its monsoon season — when its arable land typically secures a majority of its soil moisture for the year — concerns may grow that additional declines to 2012 wheat production may be in store in the months ahead.
While the dry conditions among key wheat growers coupled with increased import demand may remind traders of wheat's impressive price surge in 2010 — when prices soared by more than 60 percent between mid-June and early August — fewer price fireworks are likely to be seen this summer due to the higher overall production totals being projected in top exporting nations this year versus two years ago.
In 2010, top Black Sea exporters suffered such severe output problems due to drought that both Russia and the Ukraine effectively stopped any grain leaving that area until domestic inventories were replenished over the following months.
No such panic-inducing debacles are expected this year given that some of the top Black Sea wheat fields have recently received crop-nurturing rains and so are deemed to be in better shape than at this point in 2010.
However, combined inventories in Russia, the Ukraine and Kazakhstan are actually projected to come in below the total estimated in 2010, and so cannot be deemed so abundant that a repeat of the export constraints seen in 2010 can be ruled out altogether.
Indeed, it is clear from the trend in stocks-to-use ratios among the world's top wheat exporters that overall available supplies are declining rather than increasing, and so any further drop in production totals in those areas will only serve to enhance any sense of supply tightness that may be presently emerging.
Altogether, the wheat market appears set to take on a higher profile in the grains arena following strong import interest from China amid continuing dryness concerns in top producing regions. A combination of further crop problems and increased importer demand — triggered in part by China's recent aggressive purchasing drive — could help wheat outperform corn over the coming weeks, especially if the recent rains across the US Midwest are deemed to have alleviated the corn crop's apparent growth stress.
And while it is unlikely that wheat will repeat its summer price surge of 2010, declining stocks in top exporting regions should help to at least underpin wheat values at a global level for the coming weeks and months.
— Gavin Maguire is a Reuters market analyst. The view expressed are his own.
