By Todd Hultman
For anyone familiar with DTN's daily Closing Grain Comments, you know that I have repeatedly described the bearishness of the fundamental outlook for wheat prices for several months. USDA's estimate of 935 million bushels of U.S. ending wheat stocks and a record-high estimate of 9.83 billion bushels (267.5 million metric ton) of global ending stocks has been enough to scare noncommercial traders slightly bearish in Kansas City wheat, holding 10,116 net shorts as of Nov. 28.
To be fair, it is important to keep in mind that just over half of the world's ending stocks are held in China and India where wheat supplies are used domestically along with roughly 100 mb of imports each. But even accepting that, there is no sign of concern about obtaining supplies as spot K.C. wheat prices are hovering in the low $4s, near their lowest level in 11 years.
As bearish as the current outlook is for wheat in general, and K.C. wheat in particular, this also seems to be one of those times when it is good to step back and look at a longer-term perspective. Surveying a chart of annual spot K.C. wheat prices back to 1970, we see how prices have a history of chopping above and below their 10-year average. On the bullish side, prices can get extraordinarily volatile as we saw in 1974, 1996 and 2008, but they eventually returned to the 10-year average, usually within a couple years.
On the bearish side, prices fell significantly below the 10-year average in 1986, 1990 and in the late 1990s. In my young 58 years, 1986 was the most bearish market environment for wheat with U.S. ending stocks at 83% of annual use and high interest rates putting the squeeze on producers. However, even that painful time saw wheat prices return to their 10-year average two years later, rescued by drought.
The four-year period from 1998 to 2001 did not look as hopeless in terms of supplies as the percentages of U.S. stocks-to-use ratios were in the upper 30s. It was slumping demand from the Asian recession that kept prices depressed all four years, the longest uninterrupted time that K.C. wheat avoided its 10-year average in the past 47 years.
Here near the end of 2017, spot K.C. wheat is marking its third year below its 10-year average, now sitting roughly $2.00 below the average's $6.14. USDA's estimate of the U.S. ending wheat stocks-to-use ratio for 2017-18 is 44%, higher than what was seen in the late 1990s, but far below the high peaks of the 1980s. It is also interesting how spot prices have held above their 10-year lows since 1970. In 2016, the 10-year low of $3.68 was exceeded by 1 cent and not for long.
None of the discussion above means that wheat prices cannot trade lower as the current short-term outlook suggests they can. But we also have to recognize that, given enough time, the market has a strong balancing influence, which is often overlooked.
One lesson from long-term charts is that things always look bearish at the lows. Big harvests and heavy supplies are easily seen in the rearview mirror and understandably discourage potential buyers, but they don't tell us what lies ahead. It's that uncertainty that keeps us focused on the market in front of us. The tricky thing about the market's balancing force is that it is somewhat like the moon's influence on tides -- we can't tangibly experience it directly, but we see ample evidence of it on long-term charts.
Just as markets rotate between times of surplus and times of scarcity, prices also rotate, alternating stress between producers and consumers. Crystal balls can't tell us if weather will help prices rebound in 2018 as it did in 1988, or if it is just going to take time as it did in the late 1990s. But with USDA expecting just 45.0 million acres (ma) of U.S. wheat plantings in 2018, the lowest in a century, it is fair to say the market's balancing influence is at work.
Among the top U.S. grains, wheat is often seen as the least of these, but consider how grain market dynamics could change if wheat prices were to become attractive again. Corn and soybean prices have been suppressed the past five years by a string of good growing weather, sub-par world GDP growth, and an 11 ma reduction in wheat plantings that has indirectly resulted in more soybean acres while also allowing 90 ma of corn plantings.
As we wind down 2017, world GDP growth is showing signs of improvement and investors are enamored with record highs in the stock market and a digital watt-guzzler called bitcoin. With enthusiasm for planting wheat at historic lows and prices about to close out their third consecutive year at depressed levels, it's fair to wonder how much time is left in grains' bearish spiral.
Todd Hultman can be reached at firstname.lastname@example.org
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