CHICAGO: The world may be up to its eyeballs in wheat, but there are signs that the corner might have been turned and a contraction in wheat supply could begin by mid-2018.
And if China is excluded from the picture, the contraction has already begun.
According to the US Department of Agriculture, global wheat inventory in 2017-18 will swell to an all-time high of 268 million tonnes.
In regards to 2018-19, which will begin mid-year, the International Grains Council (IGC) said last week that world wheat stocks could shrink for the first time in six years based on a 2-percent decline in production.
The IGC's statement ignores the fact that in reality, world wheat supply may hit a four-year low by mid-2018 when considering only those supplies available on the world market. (http://reut.rs/2Dy6X3M)
Analysts often exclude China's share of world wheat carryout because the top wheat-producing country keeps its supply locked away in massive hoards and does not export.
In eight of the last 10 years, China produced an average of 10 million more tonnes of wheat than it consumed, and its stockpile quickly exploded. USDA predicts that by mid-2018, the East Asian country will be holding 48 percent of the world's wheat supply.
The recent reduction in China's wheat support price means that a material change in its wheat market structure lurks on the horizon, but any effects are unlikely to be felt until mid-2019 at the earliest.
In the meantime, Russia and the United States are two standout places where potentially leaner wheat harvests in 2018 could lead to the downtick in world supply for 2018-19.
USDA will publish its initial 2018-19 world supply and demand outlooks on May 10.
LEAD-OFF HITTERS
If a downturn in worldwide wheat production is in the cards for 2018-19, Russia may be leading the effort.
So far in 2017-18, Russia is in control of the export market following the harvest of a monstrous 85 million-tonne wheat crop, which was 17 percent larger than the previous year's record harvest.
But this was almost fully the result of record high yields and not an expansion in area. According to USDA, harvested area in Russia increased less than 1 percent over the 2016 harvest, almost negligible relative to the history. (http://reut.rs/2Dwro16)
Recent reports from Russia's Ministry of Agriculture suggest a slightly smaller winter wheat area for the 2018 harvest than in the previous year due to less favorable conditions during sowing. Winter wheat comprises about 70 percent of the country's total production and the yields often double those of the spring planted crop.
This means that Russian wheat production in 2018-19 could fall nearly 20 percent from last year under a "return to normal yields."
But that assumption needs the caveat that crop yields worldwide have not recently been returning to "normal" levels after a record year and instead pushing to even higher levels in the following year.
The United States may also assist in the global supply cut. Farmers in the top-five exporter have planted the fewest winter wheat acres since 1909, a fractional drop from the previous year. Nearly three-quarters of total US wheat output comes from the winter-planted variety.
Despite well-above average yields, the 2017 US winter wheat crop was the smallest in 15 years, primarily based on fewer acres. Combine even less area this year with questionable yield potential, and the 2018 harvest could be notably slimmer.
Drought has intensified in the Southern Plains, which has eroded crop conditions in No.1 producer Kansas and its neighbors. Weather forecasts maintain a dry outlook for the region through at least January.
FOLLOW-THROUGH
In October, China's government cut the minimum support price for wheat for the first time in over a decade, a first step in addressing the country's exorbitant stockpiles.
There are a few things that will have to happen before a meaningful reduction in China's wheat inventory could be realized, but the impact on the world market could be significant if everything falls into place.
But it was a boost in domestic consumption that has begun to draw down China's corn supply, not so much the smaller output. Beijing has pledged a concerted effort to increase use of domestic corn, which includes a robust biofuels blending program.
Although industry estimates widely vary, USDA predicts that China's total corn supply later in 2018 will be 28 percent smaller than it had been two years earlier at its recent peak.
Beijing has yet to outline further plans on how to address the country's overstuffed wheat stockpiles, but they must be able to find a reliable way to increase domestic consumption, which has been stagnant in recent years. Otherwise, a potential decrease in production might not mean much. (http://reut.rs/2DyiNv5)
The biofuels avenue may have made it easier to increase domestic corn consumption, especially moving forward. But with the biofuel option unlikely for wheat and an already-crowded world export market, it could be more difficult to ramp up China's wheat use.
According to USDA, China's wheat stocks in 2017-18 will reach a record 128 million tonnes while corn supply will fall to a five-year low of about 80 million tonnes, but many analysts believe the corn number still may be closer to 200 million tonnes.
For reference, the United States is forecast to have about 27 million tonnes of wheat by May 31 and 63 million tonnes of corn by Aug. 31, both of which would be the world's second largest carryouts next to China's.
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