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Wheat supplies remain uncertain, analyst says

Heavy snows in February have brought protection and very needed moisture to U.S. winter wheat, especially in the Plains, putting pressure on wheat prices amid expectations for a better spring/summer harvest.

But while 10-12 inches of snow looks impressive, it's still only about an inch of rain, across a wide swath of the hard red winter wheat belt that suffered moisture deficits far greater than an inch. Plains winter wheat went into dormancy last fall in the worst condition since USDA started keeping records.

"The snow was very welcome, but far from a drought-buster," says Casey Chumrau, market analyst for U.S. Wheat Associates.

In fact, she thinks the moisture might even reduce Plains wheat production. If the wheat still looks poor once the snow melts, farmers might plow up their wheat and use the soil moisture to plant more promising spring crops.

Amid reports that about 40% of the Kansas crop was near poor condition before the snow, she expects to see quite a bit of abandonment.

But mostly, from her office in Virginia, Chumrau is watching wheat demand, both foreign and domestic. After last year's drought, U.S. old-crop wheat stocks to sell are tight, and new-crop supplies remain uncertain.

Thanks to a surprising amount of wheat feeding by U.S. livestock producers, domestic wheat stocks are nearly 20% below two years ago and 7 percent below the tight level of a year ago.

HRW stocks are roughly 4.1 percent below a year ago and SRW is about 28 percent shorter.

And the U.S. still has to fill export orders, but Chumrau says old-crop stocks are sufficient.

One new potential buyer is Brazil, which can't get enough wheat from its main supplier Argentina, so it's now considering northern hemisphere wheat. Brazilian millers have reportedly checked prices in North America and the Black Sea. Typically, such wheat is subject to a 10% import duty for being outside South America's Mercosur trading bloc. But Brazil's government reportedly eliminated the duty in order to accommodate its millers. Argentina has become a less reliable supplier as political issues hobble the government. For example, says Chumrau, shippers can't get licenses to export Argentine wheat, which has pressured domestic prices. Since Argentine farmers depend on exports for half their sales, they have started to cut back wheat acreage as they lose foreign markets.

With a minor freight advantage over the Black Sea plus potential export bans in Russia and the Ukraine, the U.S. hopes to capture some Brazilian business.

"The last time Brazil removed its non-Mercosur import duty, in 2008, the U.S. captured a lot of Brazil's business," says Chumrau.

Brazil may buy from the Black Sea, but the export reliability of Russia and Ukraine is a question mark for all foreign wheat users, not just Brazil. With winterkill always a serious threat in central Asia, both Russia and Ukraine have been known to ban or discourage wheat exports in the spring until they see the actual size of their harvest. In fact, Russia has been known to import wheat, in order to keep its domestic millers happy.

This year, Russia's winterkill was reported at a minimum of 10%, with expectations that it will climb toward last year's 12%. With Russia's winter wheat acreage down 8% from last year, Chumrau is expecting a smaller crop. But she will reserve judgment until she sees Russia's spring wheat plantings.

Meanwhile, Ukraine expects a 15% larger winter wheat harvest but reports little snow cover. With several weeks of late winter and early spring left, the lack of snow puts Ukraine's wheat at risk of frost damage.

Ukraine, and to a similar extent Russia, went into late winter looking like it was mostly finished exporting until the new crop. Ukraine has had a very active export season since last summer's harvest. Both Russia and Ukraine may have little left to export.

But Chumrau notes that these Black Sea exporters often surprise the market by reporting sales even when it seems their stocks seem exhausted.

And Russian/Ukraine wheat stocks could indeed be tight because one major Black Sea customer has turned to the United States. Egypt, the world's top wheat exporter, looks for the cheapest sources, and the Black Sea enjoys low freight costs to Egypt.

But during the past three months -- as U.S. wheat prices dipped -- Egypt has booked about a million tons from the United States. Egypt came shopping about the time wheat and other commodity prices started falling in November on stalled "fiscal cliff" talks. Grain and metal traders pulled their money from the commodity markets, making U.S. wheat and corn look more attractive to foreign buyers like Egypt. Then, when equities began to rise, traders funneled money into stocks instead of grains, notes Chumrau.

The result is wheat prices that are still depressed from last year's levels, and seeing additional pressure from a recent blanket of snow over winter wheat on both sides of the Mississippi River.

On the export side, the U.S. remains in competition with Australia, Canada and Europe. Canada had a good crop last year, and ample carryover supplies this winter. Australia had a short crop, but the quality is a little better than expected, says Chumrau.

And the European Union has been exporting actively. Chumrau thinks the EU may be willing to draw down its stocks this year because the next harvest looks very good.

And India is on track to export a record amount of wheat, perhaps 7 million metric tons, up from 2 million last year. Most of it is lower quality, sometimes feed quality, and it attracts buyers who seek the lowest price.

China has emerged as an importer of feed wheat, but Chumrau can't say whether China is a major buyer of Indian wheat.


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