When looking at markets there is a tendency to focus on the headline figures around production. Media reports on things like total Canadian production or global stocks, while often not digging deeper into the details. Of course, the absolute volume of supply is enormously important to the market, but it doesn’t tell the whole story.
Consider global wheat supplies. The last USDA estimate projects the world wheat carryout to hit yet another record of 263 MMT. On the surface this looks like a crushingly bearish number. In some ways it is, although there are important dynamics within that number that also affect the outlook for wheat.
Nearly half of the projected wheat carryout is located in China. This is important for two reasons. First, the estimate for China is at best a guestimate – the actual figure could be quite different from the stated USDA figure. Second, these supplies are not available to world markets the way they would be if the inventory sat in a country that is an active seller. Non-China ending stocks are actually anticipated to decline, including lower supplies in such key exporting nations as the U.S., Australia and Canada. They will still be large, but not as burdensome as the global number would imply.
In addition, not all of the supply even in some traditional exporting countries is as available as might be the case in most years. For example, Russia is an active wheat exporter and just harvested an enormous crop. But their logistical capacity only allows them to export a maximum amount wheat over the season. In other words, at a certain point the additional production has little practical impact to exportable supplies since it’s difficult to get it to market.
Durum wheat is another interesting example. Last year Canada harvested a gigantic 7.7 MMT durum crop. The challenge was that less than half of the crop made it into the top three grades that are typically required for most export customers. The end result was a large supply of durum that got carried into the current season, most of it being of very poor quality.
This year’s durum harvest will be much closer to 5 MMT, down by over one-third. But virtually all of the crop will be of excellent quality. This means that while overall production was sharply lower, the supply of good quality durum is actually higher than last year. In addition, the availability of high quality durum will allow for some blending opportunities, which in turn will bring some of last year’s poor quality durum back into an exportable grade, further increasing the ‘usable’ supply. The result is that a much smaller crop ended up increasing quality stocks.
Like most things, the truth often lies below the surface. Grain markets are no different. Total supplies are important, but the shape of those supplies can matter just as much for the price outlook.