Wheat is undoubtedly linked to the corn market this year.
That is why the global wheat industry was anxious to see what adjustments the U.S. Department of Agriculture (USDA) would make to corn in its monthly World Agricultural Supply and Demand Estimates (WASDE) report released Aug. 10.
While the market focused on a sharp 6 percent drop in estimated world corn production, USDA reaffirmed the unchallenged ability of U.S. wheat farmers to help the world meet its grain needs again this year.
The highly documented U.S. drought and poor conditions in Europe and the Black Sea have greatly diminished the global corn and wheat outlook.
USDA slashed its 2012/13 world corn production estimate from 905 million metric tons (MMT) in July to 849 MMT this month, which would be the first production decrease since 2005/06.
The estimate of U.S. corn production, which accounts for more than one-third of world production and exports annually, decreased 55.7 MMT from July to 274 MMT.
The world wheat production estimate was lowered by 2.5 MMT from July to 663 MMT, including reductions in four of the eight major exporters. The report reduced estimated Russian production by 6.0 MMT to 43.0 MMT and reduced production estimates for Kazakhstan, Argentina and the European Union.
Australia’s production estimate remained unchanged from last month but is down 12 percent from 2011/12.
In contrast, USDA’s estimate of U.S. wheat production increased 1.2 MMT to 61.7 MMT, the highest estimate of the marketing year to date and 14 percent greater than 2011/12.
With total U.S. wheat supply of 85.4 MMT, more than 6 percent greater than the five-year average, the United States is prepared to respond to market needs.
USDA currently expects the United States to meet nearly 25 percent of global wheat demand with exports of 32.7 MMT.
Last year, many livestock and poultry feeders shifted from corn to wheat as prices converged and ample global supplies of feed quality wheat were available.
Tight corn supplies and high corn prices this marketing year could once again force feeders to seek alternatives. USDA dropped its global corn feed use estimate this month by 27.2 MMT to 509 MMT.
If local wheat prices and feed quality wheat supplies allow, wheat may help meet part of that demand. In fact, USDA increased its estimate of global wheat feed usage by 3.76 MMT to 134 MMT compared to last year's record 146 MMT.
In this month's report, USDA also upped predicted domestic feed wheat use by 10 percent from July to 5.99 MMT, 35 percent greater than 2011/12.
Fundamentally bullish news
While the WASDE contained fundamentally bullish news, its release pushed U.S. wheat futures lower on Friday, adding to the last month’s downward trend.
Some of the world’s top wheat buyers have issued multiple tenders in recent weeks to take advantage of slightly lower prices.
While recent news downplays the risk of a Russian export ban, SovEcon, a leading agricultural analyst, said Wednesday that Russia’s exportable grain surplus could run out by November.
USDA did lower projected Russian exports from 12.0 MMT to 8.0 MMT in the August WASDE, compared to 21.6 MMT exported last year.
Russian officials have publicly declared they do not intend to impose export restrictions or tariffs this calendar year, but have not definitively ruled out any measures in 2013. Whether or not any of this comes to fruition, it adds even more uncertainty to the market.
That uncertainty will likely persist into the U.S. wheat planting season. Weather conditions between now and then will influence farmers’ decisions on what to plant.
Competition for acres in the United States has intensified greatly the last five years with wheat acres most often sacrificed for increasingly profitable corn and soybeans.
With significant portions of U.S. wheat area falling within current drought zones, farmers may decide against a winter wheat crop if they do not receive adequate moisture.
Another possibility is farmers who intended to plant corn or soybeans could switch back to wheat, which performs better with less moisture, pushing wheat acres higher.
As always, commodity prices and federal risk management programs will also factor into the decision.
Both the weather and corn market have been the major driving forces of wheat prices so far in 2012/13. The weather is responsible for a shrinking world wheat output and much uncertainty lies ahead.
However, an above average U.S. crop is a bright spot for world wheat customers no matter what else transpires the rest of the marketing year.