A closer look reveals vulnerability in wheat supplies

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On a global scale, world wheat buyers appear to be in a very favorable position to begin the new crop year. In its World Agricultural Supply and Demand Estimates (WASDE) report, the U.S. Department of Agriculture (USDA) estimates 2012/13 world wheat supply will reach the second highest level on record at 868 million metric tons (MMT).

However, a closer look reveals a more fragile wheat market. In fact, there will be less wheat available this year to meet higher global demand.

The difference is China and India. The two largest wheat-consuming countries will account for more than 30 percent of total world supplies and total wheat consumption in 2012/13. Despite their abundant supplies, the two countries together accounted for less than 1 percent of world exports on average the past five years. In order to meet such high domestic demand, supplies inside these countries are effectively unavailable to meet demand in the rest of the world.

In fact, USDA expects China will be a net importer of wheat for the second consecutive year in order to refill stocks of high quality wheat used to meet growing demand for western-style wheat foods. In India, USDA estimates export of 2.5 MMT in 2012/13, which would be a sharp increase from the five-year average of 190,000 metric tons and just the fifth time Indian exports exceeded 2.0 MMT. If realized, Indian exports would still account for less than 2 percent of total world wheat trade.

USDA expects 2012/13 world wheat production and total supplies including China and India to be 1 percent and 5 percent greater than the five-year average, respectively. If China and India are removed from the equation, the available wheat situation for the rest of the world looks very different. Excluding the two countries, production in the rest of the world is expected to decline an estimated 2 percent from the five-year average with available supplies remaining unchanged. In the five traditional major export countries and the three major Black Sea exporters, which account for 88 percent of world wheat exports, USDA expects production to fall 3 percent below the five-year average.

Yet, estimated consumption outside India and China is up 3 percent from the five-year average. World consumption, both including and excluding China and India, set new records the last four years and USDA estimates total consumption will reach the second highest level on record in 2012/13. In short, USDA expects less wheat available for export and higher demand.

The ending stocks-to-use ratio further shows the fragility of the market. The ratio indicates the level of carryover stocks as a percentage of the total use; a lower percentage indicates tighter supplies. According to current USDA estimates, the 2012/13 global stocks-to use ratio (including China and India) is 27 percent, equal to the five-year average. However, the ratio drops to 22 percent when excluding China and India, compared to the five-year average (also excluding China and India) of 24 percent. If realized, the 22 percent would be the lowest stocks-to-use level for available supplies since 2007/08 when it fell to 19 percent.

Current world wheat stocks are not at the critical levels seen in 2007/08. However, a close evaluation of available world stocks indicates the market is more vulnerable than it appears on a global level. The final production level of southern hemisphere crops and northern hemisphere spring-planted crops is yet to be determined, and the size of the 2012 corn crop will affect the level of wheat feeding around the world. Any significant supply reduction from current estimates would considerably reduce the amount of wheat available to meet growing demand. Given this vulnerability, world wheat buyers might consider securing high quality wheat now to reduce supply risks later.

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