Thursday, September 16, 2010

Long-Range U.S. Wheat Export Prospects Rosy

Pat Hill, DTN Markets Editor talked with Vince Peterson, U.S. Wheat Associates Vice President of Overseas Marketing for his perspective on the prospects for this year's exports, and what may lie ahead -- important questions for producers who are deciding how much winter wheat to plant in the coming weeks.

Peterson, who is presently in Brazil, responded by email.

DTN: U.S. wheat exports have averaged 27.7 MMT in the past 10 years, and only in 2007/08 did exports total 34 MMT. Is this jump in exports this year a one-off deal or the start of stronger long-term demand?

Peterson: This is a question that actually has a little more to it than just what sits on the surface with the elevated export year's numbers. Our ability to export and substantially increase exports over time is, at its root, subject to what our long-term prospects might be for wheat production.

This year, and probably next year for that matter, we have an export ability which has been enhanced. That is because growers have not been particularly happy with wheat prices the past two years and have, in many cases, chosen to store and carry wheat, rather than sell it. That put us into a large carry-in stock position (26.5 MMT or 973.6 million bushels, more than three times what were carried into the 2008 crop) plus a larger-than-average wheat crop (62 MMT this year versus about 58 MMT on a 10-year average).

In the end, with "bonus" stocks from Canada, we started with a total supply topping 90 MMT at the beginning of the year.

We use 32 MMT (on average) for food, feed and seed each year, so for this year, we can export 34 MMT (USDA's current number) or even more and only drop our ending stocks down by about 3 MMT (more if exports exceed 34 MMT). In this case, we'd still start 2011/12 (June) with another very adequate [supply], particularly as there is an incentive for farmers to plant more wheat based on current strong prices (this is especially true with soft red winter wheat). At the moment, I'd say the odds are quite good for the U.S. to have another very good export sales pace in 2011/12.

But, in the future, if we produce ongoing "average crops" of 58 MMT, use 32 MMT domestically and want to maintain stocks at a constant level, then we can expect to export about 25 to 26 MMT per year. To do more consistently means that we have to increase production beyond our "averages." Filling unexpected supply gaps as we are helping do with the Russian export ban will draw down stocks and create price volatility that is not pleasant for our customers or our farmers.

I am absolutely convinced that the world trends will be steadily increasing: a higher total demand for wheat and a demand for higher total world trade as we move out well out into the future. That means the opportunity exists for continually expanding exports from the U.S. as far out as we might imagine.

The problem with projecting that is that the U.S. share of expanding trade will depend upon our producing wheat in ever increasing quantities to match that demand and trade growth. Our 10-year production trend might be up very slightly (1 percent to 2 percent), which has been aided by some better yields in the more recent years as opposed to some of the drier times just a few years back. The fact is that wheat land area in the U.S. (and world-wide) has been decreasing for decades. Our (and the world's) ability to keep up with world wheat demand has only been achieved due to varietal improvements from traditional plant breeding and better, more efficient, farming practices that allows growers to increase yields and maximize productivity on fewer acres.

But the answer to the future will depend upon whether the U.S. (and most other origins) are able to buy land area back from corn and oilseeds. And if so, how will we do it? Higher prices are one answer, and that one is playing out this year. But long term, advanced technology almost has to play a part. Traditionally bred wheat has produced yield gains, but those are running far behind corn and oilseed gains (and therefore profitability), which have been able to take great advantage from biotechnology.

DTN: Ahead of the report, there were news stories speculating about further increases, with some mentioning prospects as high as 37 MMT. Do you see that as possible or likely? What might it take for the U.S. to have that much business?

Peterson: Yes. Ahead of the last report, some forecasters were expecting an increase in USDA's forecast to 34 MMT -- and they hit that one right on the head. At the same time, almost from the day the Russian government imposed the embargo on all wheat exports beyond August 15, forecasters have been bantering about the potential impacts of that event. I have seen projections ranging to as much as 36 to 37 MMT, and frankly, cannot discard that as out of the range of the possible this year.

But the Russian embargo is not the only reason for looking at the potential for higher U.S. export numbers this year. Germany suffered severely from rains throughout harvest. It would appear unlikely that little more medium and higher quality (protein) milling wheats will be exported from Germany. In fact, we have seen reports of French milling wheat moving to Germany and German feed wheat moving elsewhere in the EU. German milling wheat has been sold in recent years to many Middle East and African markets -- and it's possible that some advanced sales may have to be filled from other origins. The demand for high-protein North American wheat and durum in the EU to compensate also appears to be growing daily (U.S. spring and durum sales to the EU and positioning in the St. Lawrence has already reached 900,000 MT by Sept. 10 versus 600,000 MT total in the last marketing year).

While carry-in stocks were higher than expected and USDA forecasts higher production, the Canadian crop, which was already known to suffer in volume following the wet, late planting last spring, is now being plagued by rain (which is also slowing harvest in Montana and North Dakota). One [recent] weather forecast called for rain in Saskatchewan in the next 7 of 9 days. A further loss of good-quality milling wheat in the world supply total continues to support the U.S. export position this year.

The better crop in Eastern Australia seems to be about the only other bright spot this year, and Australia's ABARE pushed up its production forecast recently.

At any rate, there are still some variables to determine and play out, but we are still very early in the year. Very early. The last time the Russians pulled out of the export market (2007/08, when the U.S. did 34-plus MMT of wheat exports) Russia didn't impose prohibitive export taxes (which effectively closed exports) before they had already sold and exported 12 MMT for the year... this year they pulled the plug after something over 3 MMT.

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