Tipping the balance – Chinese demand vs new crop weather

Image of harvested grain pouring into a chaser bin

The fallout of this weeks USDA report has seen most of the major ag commodities come under pressure. The common theme of tight ending stocks for corn and beans remain, although the lack of new bullish news had the effect of seeing some profit taking. Overnight, the Black Sea re-emerged as a competitive source for wheat, with the recent GASC (Egypt) tender being awarded to Russian, Ukrainian and Romanian origins. This highlights the uncompetitiveness of US wheat.

China’s demand for wheat is up 5mmt from February and up a sizeable 16mmt year on year.  China’s demand for feed has underpinned the entire ag complex this past 6 months and is something of a conundrum.   It is a widely held belief that China holds 50% of the worlds wheat stocks yet is increasing demand.  Maybe it would be fair to assume that high bean and corn prices are shifting that demand to alternative feed sources. 

Another head scratcher is the assumption that the Chinese pig herd is back to pre-African Swine Fever levels.  Over the past month, stories started circulating that another outbreak had been detected, potentially killing as many as 8 million sows.  The assertion that the Chinese pig herd has ‘recovered’ seems implausible, again backed by a rising pork price for meat and restocker animals.  Whether this has ramifications for feed demand going forward remains to be seen.

The next potential market mover will be the USDA acreage report towards the end of March.  This is going to give us an early look at the trades expectations for corn and bean planting intentions.  The expectation is that the US row crop acreage will be huge.  Spring weather in the US is going to have a big impact on price direction given that wheat will remain a follower of corn and bean prices.

If you look at wheat in isolation, the USDA report indicated a tightening of global stocks to use (14.7%) in the major exporters (ME) yet a small increase in ME overall stocks.  The Northern Hemisphere winter wheat crop does not appear to have too many issues at this stage but there is ample time for this to change.  If we assume no production problems and row crop acreage to be within trade estimates, it is hard to mount an argument for prices to push too much higher.

The week ahead….

As we move closer to gaining clarity on the Northern Hemisphere winter crop, expect the market to move lower in the absence of fresh production concerns. 

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Data sources: AWEX, Mecardo

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