Our look at the World Agricultural Supply and Demand Estimates (WASDE) report last week showed that despite close-to-record wheat production, the stocks-to-use ratio remained close to 10-year lows. We had a query as to why wheat prices were weak when supply was seemingly tight.
Figure 1
shows the closing stocks-to-use ratio for global wheat, as reported by the
United States Department of Agriculture (USDA), along with the average annual price
of CME spot wheat futures.
The stocks-to-use
ratio is simply calculated by dividing ending stocks by consumption for that
year. A stocks-to-use ratio of 33% tells
us that if no wheat is produced in the coming year, around a third of
consumption will be covered by stocks.
Stocks to use is a simple measure of supply versus demand.
Basic
economics tells us that the lower the stocks-to-use ratio, the higher the
prices should be, and vice versa. Figure
1 shows us that in a broad sense, lower wheat stocks do equate to higher
prices, as we saw in 2007-08 and 2012-13.
Strong wheat stocks in 2017-18 saw weak prices last for a few years.
The current
forecast wheat stocks to use ratio for 2024-25 is 32.2%. The last time stocks to use were this low was
in 2014-15, when the average wheat price was 523¢/bu. The average wheat price for 2024-25 to date
(since July 1) has been 557¢/bu.
Wheat
doesn’t operate in a vacuum. The price is
impacted by other grain supply and demand, with corn being the largest
factor. Corn is a substitute for wheat
in animal feed markets, and wheat and corn prices tend to move in similar
directions.
Figure 2
shows corn prices and stocks to use ratio on an annual basis. Corn stocks to use have been remarkably
steady for four years, and around 26%, and this is forecast to extend into a fifth. Corn prices have also declined, but are still
above where they were in 2019-20 when corn stocks to use first fell to
26%.
The
stronger corn prices of 2020-2023 were due to wheat and soybeans dragging them
higher, then all grains and oilseeds were obviously given a massive lift by the
war in Ukraine.
What does it mean?
Current wheat prices are not particularly low when compared to the past ten years. Compared to the past three years wheat is cheap, but the war in Ukraine has been artificially boosting values. Additionally, corn stocks to use have been steady, and in the absence of any bullish news, prices have eased, dragging wheat with it.
For prices to rise, there will have to be some issues with northern hemisphere spring crops. For sustained improvements, supply will have to be cut.
Key Points
- The global wheat stocks-to-use ratio is close to a 10-year low, yet prices are weaker.
- Historically the current wheat price fits ok with stocks to use at this level.
- Steady stocks to use in corn, and forecast good supply, are helping keep a lid on wheat prices.
Click on figure to expand
Click on figure to expand
Data sources: USDA, Mecardo
