January 19, 2009

Export demand should remain the dominant fundamental factor for US wheat futures until dormant plants resume growth in the spring, with lower-than-expected acreage estimates pushed to the back burner amid concerns about slow sales, analysts said.

 

Export demand has waned amid stiff competition for business from countries in the Black Sea region, including Russia. The slowdown has some analysts predicting the US Department of Agriculture will trim its 2008-09 US export forecast before long, although others say strong early season sales should compensate for the current slump.

 

Egypt's state-owned wheat buyer, the General Authority for Supply Commodities, on Thursday booked one cargo of US wheat, but the purchase does not signal a turnaround in demand, analysts said. US wheat remains too pricey on the world market, they said.

 

"If we go another month without many sales and we're lagging farther behind, they're probably going to have to cut exports," Doug Houghton, market analyst for Brock Associates, said about the USDA. "We're going to have to find some [export] markets out there."

 

The USDA, in a monthly supply/demand report issued Monday, kept its export estimate unchanged from December at 1 billion bushels. Total use fell to 2.26 billion from last month's estimate of 2.292 billion due to reductions in estimates for feed and seed use. In corn, meanwhile, the USDA cut usage projections for feed, ethanol and exports.

 

"In wheat, they really didn't go there," Linn Group analyst Roy Huckabay said of USDA officials who adjusted the demand tables. "They're probably going to have to go there in wheat also. The sales in wheat were so good early that we've blinded ourselves to just how bad they're been recently."

 

Weekly US wheat export sales for the past two reporting periods have been disappointing, traders said. Export sales for the week ended Jan. 1 were 41,900 tonnes, a marketing-year low.

 

Sales for the week ended Jan. 8, including business for the 2008-09 and 2009-10 marketing years, were 167,900 tonnes, below trade expectations of 200,000 tonnes to 400,000 tonnes. Sales of SRW wheat were negative following cancellations, including for 60,000 tonnes of soft red winter wheat previously sold to Egypt, according to USDA data. The 2008-09 wheat marketing year began in June.

 

Egypt said Thursday it bought 55,000 tonnes of US SRW wheat and 28,000 tonnes of Russian wheat in a tender. Traders said they were glad Egypt bought something from the US after recent snubs but that the purchase does not indicate US wheat has returned as a strong competitor on the world market.

 

GASC purchased the US wheat from Alex Grain for US$183.90 per tonne, an official said. Other bids for US wheat were well above that level and more expensive than some bids for Russian and French wheat, according to a breakdown of the bids. The next closest bid for US wheat was about US$194 per tonne.

 

"The wheat that they picked up [Thursday] was aggressively priced," said Shawn McCambridge, analyst for Prudential Bache. "We're still way above the Russian wheat, pretty much all the way down through the line that was being offered. It's good to see that cargo being bought, but I don't think it's an indication that it's something that's going to continue, unless we continue to see wheat being heavily discounted."

 

Russia will likely continue to export wheat below the price of traditional exporters, such as the US and the EU, as long as it doesn't run out of grain and there are no quality issues, McCambridge said. Russian wheat is generally of lower quality than US wheat.

 

The slow pace of exports and expanding global supplies make it difficult for prices to climb before the markets have a better sense of US crop conditions, analysts said. Plants go dormant during the winter to protect themselves from the cold and won't resume growth until the spring.

 

Winter wheat plantings for 2009 were lower than expected in the USDA's January seedings report, a factor that would normally be seen as bullish because it indicates production will be lower. However, the size of the upcoming crop doesn't matter as much if exporters can't make sales, analysts said.

 

"It's not how much you've got; its how much you can't sell," Linn Group's Huckabay said.

 

The USDA put all winter wheat seedings at 42.098 million acres, below the average analyst estimate of 44.178 million and the 46.181 million acres planted in 2008. SRW wheat acres were pegged at 8.3 million acres, below the average analyst estimate of 9.381 million and the 11.2 million acres planted in 2008.

 

SRW wheat, traded at the Chicago Board of Trade, is grown in the eastern Midwest and used for pastries and snack foods. It can compete with corn for use as animal feed, if it is priced cheaply enough.

 

World wheat carryout for 2008-09 was estimated at 148.4 million tonnes, up from the USDA's December estimate of 147.4 million. The world is projected to produce a record crop in the 2008-09 marketing year due to good weather and farmers who expanded plantings to take advantage of high prices.

 

"The winter wheat seeding number was down, but you have very high old-crop stocks," McCambridge said. "The production will really be determined in the spring. That uncertainty that's out there will be something that we deal with once we get closer to the crop breaking dormancy."