Commodity markets do not like surprises

• These small surprises contributed to wheat market losses on the day of the release, but the markets have since recovered.

Commodity markets do not like surprises.

That theory was tested once again when the U.S. Department of Agriculture (USDA) raised its 2012/13 world wheat supply estimate significantly more than expected on April 10. After the release of USDA’s monthly World Agricultural Supply and Demand Estimates (WASDE) report, all three U.S. wheat futures markets reacted by falling 2 percent before the end of the trading session that day.

The first surprise in the report was a 2.9 million metric ton (MMT) increase in estimated world carry-in stocks for wheat.

The increased projection of 199 MMT reflects a number of revisions to the 2011/12 world wheat usage estimates, including lower wheat consumption estimates in the European Union and Morocco.

The adjustments left more wheat supplies to start the 2012/13 marketing year than previously estimated. USDA left 2012/13 world production unchanged at 655 MMT, putting total supply estimates at 855 MMT.

In addition to larger supplies, the report added pressure to markets by reducing total estimated world wheat use by 1.1 MMT to 673 MMT. The lower usage number was the result of USDA’s second major surprise — a 5.2 MMT reduction in projected world wheat feed usage to 129 MMT.

Much of the decline was due to a 3.0 MMT reduction in China’s feed use to 20.0 MMT. USDA lowered projected feed in the United States by 41,000 MT to 9.8 MMT, the only change to U.S. supply and demand estimates other than a corresponding increase in ending stocks.  

Exceptionally tight corn supplies have forced more wheat into the animal feed markets the last two years. However, USDA lowered the 2012/13 wheat feed usage estimate in the report, offset by higher projected food and seed usage of wheat. If realized, wheat feed usage would still be the second highest of all time, behind the record 145 MMT in 2011/12.

The combination of higher beginning stocks and lower use led to USDA’s third surprise – higher ending stocks for wheat. USDA increased its projection of wheat to be carried into the next marketing year from 178 MMT to 182 MMT.

It would be the lowest in three years but 11 percent greater than the 10-year average and significantly higher than 2007/08, when just 128 MMT were carried over.

Together, these small surprises contributed to market losses on the day of the release, but the markets have since recovered and analysts will soon begin predicting what next month’s report will hold.

In the May 10 WASDE, USDA will release its first full supply and demand estimates for the 2013/14 marketing year.

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