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Global Demand, Trade, and La Nina

US winter wheat farmers have begun planting. At the moment, the global wheat balance sheet is looking fairly flush. However, increased import demand from China, geo-political tensions and potential production issues tied to weather (including the recently formed La Nina) may provide a tailwind for prices moving forward.

Plenty of Wheat (at the moment)

Based on current USDA estimates, at the end of the ’20-’21 crop year the global wheat surplus is projected at 319.4 million metric tons (MMT). To put that in perspective, global estimated annual wheat consumption is equal to 750.9 MMT. This places the stocks to use ratio, determined by dividing ending stocks (annual production surplus) by total usage, at 42.53%. 

Put another way 42.53% of next year’s expected wheat usage already exists and is in storage. 

Given the ten-year average global stocks/use ratio[1] for wheat is 32.88%, we believe it is fair to say that, based on current projections, there is plenty of wheat.

The caveat, of course, is that these figures are based on guesses.

Threats to the Balance Sheet

Presently there are three evolving threats that we believe may result in a tighter wheat balance sheet, and potentially higher prices.  

1.      Increased demand from China

2.      International relations/trade

3.      Weather (La Nina) impacts on production

Chinese Demand

The Chinese are on pace to import record amounts of grains (corn, soybeans, wheat) during the ’20-’21 crop year. The market has been focused on the Chinese import figures for US corn and soybeans, but less so on wheat. That focus may be shifting.

In the September WASDE (World Agriculture Supply and Demand Estimate) Report, the USDA shared that Chinese wheat imports are expected to reach 7 MMT. This represents roughly a 30% YoY increase in Chinese wheat imports and is almost double the trailing 10-year average of 3.59 MMT. On a calendar basis, year to date Chinese wheat imports are up 137% through August 2020 versus 2019. 

To be certain, 7 MMT represents less than 1% of global wheat usage and will not have a material impact on the balance sheet one way or another. That said, the increase in Chinese imports of grains has led to speculation that China may be facing a food crisis. It is no secret that Chinese grain production has taken a hit this year as farmers there have been battling floods, typhoons, army worm and locusts. Given these market conditions it is possible that China’s wheat imports will exceed 7 MMT. 

The Chinese buying may simply be due to their need to supplement domestic production. However, it could also be true that the Chinese may be stockpiling grains as a security measure given heightened geo-political tensions and supply chain uncertainty.

International Trade

We have already seen supply disruptions due to COVID-19. Back in March there was a real concern that major wheat producing countries (such as Russia) would place caps on exports. Trade fears helped push the front month wheat futures contract up roughly 7.5% for the month of March.[2] Still today, there is a real threat that countries may limit their wheat exports moving forward. In-fact, the USDA is estimating that Ukraine and E.U. wheat exports will decline in the current crop year by 14% and 34% respectively. Currently the USDA is expecting an increase in wheat exports from the US, Russia, Canadian, Australia.  The increase in exports for the aforementioned countries is dependent on stable trade relations, and overall wheat production. Production, of course depends on weather, and the weather is already causing some concern.

La Nina

On September 10^th the National Ocean and Atmospheric Administration (NOAA) confirmed that a La Nina climate pattern had officially developed. During the winter months La Ninas typically result in drier than normal conditions for the Southern Plains. The US winter wheat crop, being planted right now, can account for nearly 70% or more of the total US wheat production. Drought conditions are already showing up in the Dakotas, Nebraska, Colorado and Texas. Additionally, Texas, Oklahoma, and Kansas account for nearly 50% of the US winter wheat crop. Farmers in those states are likely to be battling drier conditions this winter which can negatively affect production. The extent of the impact of La Nina will depend on the strength of the La Nina.

We do not need to look too far to find historical examples of strong La Ninas; the last one occurred during the years from 2010-2012. This was one of the strongest La Ninas on record. It resulted in a severe drought across the US farm belt, wheat production declined nearly 10% YoY, and average farm price per bushel jumped 27%. 

The ’20-’21 US wheat production is already estimated to be down 4% versus last year. A further 6% reduction for example, (all else being equal) would bring the US stocks/use ratio below 40% for the first time since the ’15-16 crop year. Still, the impact to the global balance sheet would be minor, assuming the USDA’s global supply and demand guesses prove accurate.

Furthermore, it is unlikely that all else will be equal. La Nina affects weather across the globe, not just here at home. Argentina and Australia are two very important wheat growing areas that have also been hard hit by La Ninas in the past. 

La Nina occurring in the summer months (June through August) has the tendency to create very dry conditions in Argentina. Dryness in Argentina is already having an impact in 2020. The Argentine wheat harvest, which begins in December, is expected to come in at 17.5 MMT versus the 21 MMT that was projected back in May. Should La Nina linger through next summer we would expect Argentina to remain dry. 

Argentina was hard hit by the La Nina 2010-2012 La Nina.   During these crop years, drought was a major factor that led to a 40% decline in production. As a result, exports declined nearly 70% over the same period.

Additionally, if the La Nina extends through the summer, we would expect wetter weather to cause problems for Australian farmers. The 2010-2012 La Nina brought historic rains to Australia causing massive flooding. Australian wheat production declined nearly 70% between the ’11-’12 and ’12-’13 crop years. Australia went from exporting 24.7 MMT of wheat in ’11-’12 to just 18.65 MMT in ’12-’13; a 24% decrease. As it stands right now, the USDA is expecting near record production of Australian wheat over ’20-’21. A strong, lingering La Nina may put a dent in those figures. 

Current NOAA modeling shows La Nina conditions strengthening through early winter 2021 before reversing course and ending somewhere between March and May.  As you can see from the table below, the range of forecasts is wide. This leaves open the potential for a quick return above the threshold as well as the potential for strong, prolonged La Nina.

Conclusion 

Given the current adequate global supply of wheat, it is unlikely that any one development would cause a significant tightening of the balance sheet. However, the combination of increased global demand, geo-political tension/trade, and adverse weather could certainly change things in a hurry.

Note that options are available on the Teucrium Wheat Fund (Ticker: WEAT). Please consult your broker/Financial Advisor

[1] Reference the last 10 crop years ’10-11 through ’19-‘20

[2] For comparison, the S&P 500 lost over 12.5% in March. How diversified is your portfolio?