The Outlook for Wheat

Transcription

1 The Outlook for Wheat By Dan Manternach Advisory Services A Division of Vance Media Corporation For North Dakota Wheat Commission Nov 10, 2009

2 s Data Dashboard Reducing WASDE supply/demand stats to five key measures of fundamentals Of course the actual gauge measure compared to past years, is almost irrelevant. Year-to-year shift is old news. It s the month-to-month CHANGE and the TREND that matter; whether these gauges are slipping lower, towards further stocks drawdown or creeping higher toward stocks build-up. Should market action following a new balance sheet seem contrary to the change in the gauges, it doesn t mean they don t matter only that traders are already expecting a fundamental shift in the next report. 2

3 What the Gauges Tell Us: Gauge #1: U.S. carryover expressed in days supply. This tells us how long projected U.S. ending stocks will last at the current rate of U.S. domestic usage and exports. Gauge # 2: Global stocks:use ratio. This tells us how big global stocks are relative to the current rate of global usage. It can either water down or intensify the price impact of what s happening in the U.S. supply/demand balance sheet (Gauge 1). Gauge #3: Global stocks:trade ratio. Sometimes, the trend in the ratio of global stocks to global trade is more significant than the ratio of stocks to overall usage because it takes higher prices to limit export trade, whereas reduced availability alone can limit domestic usage, particularly in developing countries. 3

4 Interpreting Dashboard gauges (continued from previous slide) Gauge #4: Exporter stocks:trade ratio. Often the level of projected global ending stocks is less important than which countries hold them. So long as export competitor stocks are steady to rising, they don t get overly alarmed even when global stocks are tightening. But if exporting country stocks are declining, it s more price sensitive. Gauge #5: Importer production:use ratio. When importing country production drops relative to usage, they will have to import more to maintain that usage. If instead their ratio is trending higher, it can mean less import demand. 4

5 Gauge # 1: U.S. Carryover in Days nearly a 5-month supply at current usage rates; clearly burdensome US Wheat Carryover in Days

6 Gauge # 2: Global Stocks/Use Ratio Trend turned flat in Oct. despite huge jump in U.S. stocks; just adequate at 3.5-month supply 30% 28% 26% 24% 22% 20% 18% 16% Global Wheat Stocks/Use Ratio 6

7 Hist. perspective and outlook for Gauge 2: Just adequate 100-day supply with average ; vulnerable to squeeze with poor in any given year. Forecast 7

8 Gauge # 3: Global Stocks/Trade Ratio turned down in October Global Wheat Stocks/Trade Ratio 155% 145% 135% 125% 115% 105% 95% 8

9 After declining into July, super spring wheat yields sent stocks soaring 9

10 Similar pattern for durum; late spring and planting sent yield estimates down into June, but the reality was fantastic yields and rising stocks:use ratio until August 10

11 Gauge # 4: Exporter Stocks/Use Ratio turns downward in October 29% Wheat Exporter Stocks/Trade Ratio 27% 25% 23% 21% 19% 17% 11

12 Gauge # 5: Importer Production/Use Ratio takes a second straight monthly dip Wheat Importer Production/Use Ratio 81% 80% 79% 78% 77% 76% 75% 12

13 Wheat: 5-Year Class-by-Class Ending Stocks in Days Supply (only white wheat still under 90-day threshold of tight for 09/10) / / / / /10 Hard Red Winter Hard Red Spring Soft Red Winter White Winter Durum HRW HRS SRW White Durum 2005/ / / / /10 13

14 World Wheat Production to rebound slightly; use to level off in Million Metric Tons Production Use 14

15 * * * * * Wheat: U.S. Acreage History and Outlook U.S. Wheat Acreage drops sharply in 2009, a little more in 2010, rebounds slightly in 2011, then resumes a long-term downtrend consistent with long-term trend for 12 and 13 before rebounding in 14. * Projection 15

16 No fluke! A New Era for wheat prices was launched in 2007/08 ($4 wheat is now the old era $2.50 wheat) New top third of price range next 5-10 years New middle third of prices range next 5-10 years New bottom third of price range next 5-10 years

17 Trading Funds are a constant wild card ; driven primarily by technicals 17

18 Index Funds are another wild card, driven mostly by perceived inflation risk 18

19 All Wheat: Outlook for under 3 scenarios ALL WHEAT USDA 2009/10 DOANE 2009/10 poor average ideal Acres planted (millions) Yield (Bu/Ac) Production & Imp. (Million Bu.) Domestic use (Million Bu.) Exports (Million Bu.) Total Use (Million Bu.) 2,330 2,330 1,930 2,204 2, ,223 1,205 1,230 1, ,025 2,123 2,098 2,155 2,205 2,280 Carry out Avg. Farm price $4.55-$5.15 $5.15 $6.35 $5.60 $

20 What history tells us about potential highs and lows for futures as a % of our yearly farm price assumptions under 3 scenarios ALL WHEAT Poor Average Ideal average farm price forecast for the market year: $6.35 $5.60 $ yr avg. high in Chic. July futures as a % of avg. cash price for year: 125% 125% 125% (15-yr record high as % of cash price:) (196%) (196%) (196%) Implied potential high for July 2010 futures using 15-year average : $7.94 $7.00 $ yr avg. low in Chic. July futures as a % of avg. cash price for year: (15-yr record low as % of cash price:) 86% (73%) 86% (73%) 86% (73%) Implied potential low for July 2010 futures using 15-year average : $5.46 $4.82 $

21 Spring Wheat: Outlook for under 3 scenarios USDA 2009/10 DOANE 2009/10 poor average ideal Acres planted (millions) Yield (Bu/Ac) Production & Imp. (Million Bu.) Domestic use (Million Bu.) Exports (Million Bu.) Total Use (Million Bu.) Carry out Avg. Farm price $5.95 $5.65 $5.00 $

22 What history tells us about potential highs and lows for futures as a % of our yearly farm price assumptions under 3 scenarios SPRING WHEAT Poor Average Ideal average farm price forecast for the market year: $5.65 $5.00 $ yr avg. high in Chic. July futures as a % of avg. cash price for year: 125% 125% 125% (15-yr record high as % of cash price:) (196%) (196%) (196%) Implied potential high for July 2010 futures using 15-year average : $7.94 $7.00 $ yr avg. low in Chic. July futures as a % of avg. cash price for year: (15-yr record low as % of cash price:) 86% (73%) 86% (73%) 86% (73%) Implied potential low for July 2010 futures using 15-year average : $5.46 $4.82 $

23 Durum Wheat: Outlook for under 3 scenarios USDA 2009/10 DOANE 2009/10 poor average ideal Acres planted (millions) Yield (Bu/Ac) Production & Imp. (Million Bu.) Domestic use (Million Bu.) Exports (Million Bu.) Total Use (Million Bu.) Carry out Avg. Farm price $4.90 $5.40 $4.75 $

24 What history tells us about potential highs and lows for futures as a % of our yearly farm price assumptions under 3 scenarios DURUM Poor Average Ideal average farm price forecast for the market year: $5.40 $4.75 $ yr avg. high in Chic. July futures as a % of avg. cash price for year: 125% 125% 125% (15-yr record high as % of cash price:) (196%) (196%) (196%) Implied potential high for July 2010 futures using 15-year average : $6.75 $5.94 $ yr avg. low in Chic. July futures as a % of avg. cash price for year: (15-yr record low as % of cash price:) 86% (73%) 86% (73%) 86% (73%) Implied potential low for July 2010 futures using 15-year average : $4.64 $4.09 $

25 1 st quarter: September lows were a buying opportunity in March futures; but October rally since then still in lower half of 1 st quarter price forecast range Forecast Range 25

26 2 nd quarter 2010: July futures hit overhead resistance at $6 mark; triggering our first advised sale of 2010 crop (10%) Forecast Range

27 3 rd quarter: September futures near midpoint of forecast price range Forecast Range 27

28 4 th quarter: December futures nearing mid-point of forecast price range Forecast Range 28

29 Seasonal price patterns for all classes of wheat combined 29

30 Seasonal price patterns for Spring Wheat 30

31 Seasonal price patterns for Durum wheat 31

32 Farmer Marketing patterns by month: 32

33 Wheat: Concluding remarks Though well off extreme highs of 2008, we re in a new era of higher wheat prices. Thus, while even current prices used to be considered at the high end of the former long-term price range, they are now at the low end of the range we see going forward. ($4 wheat is the old $2.50 wheat a major bargain) The role of Index funds is huge and complicates forecasting, as they wield billions of dollars and base decisions on perception of inflation risk in general rather than supply and demand for the commodity itself or even technical considerations in wheat. We continue to monitor trends in their positions and the factors that drive them, the so-called outside markets. 33

34 Wheat: Concluding remarks (continued) A wider array of price risk management tactics is highly advised for both producers and users. With appropriate futures and/or options tactics, previous decisions can be mitigated or reversed when the outlook changes significantly due to: 1) problems in wheat regions here or abroad 2) overall global economic outlook (demand) 3) political/regulatory developments here or abroad At any given time, both producers and buyers face price risk on 100% of your volume; Either adverse price movement on what isn t hedged or potential opportunity cost on what is hedged. With futures/options tactics, both types can be managed at the same time. 34

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