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Chicago wheat hit 4-month highs at the beginning of last week, and this rise was greatly influenced by large purchases of US Soft Red Wheat (SRW) by China. With these significant movements, new questions arise. Will this demand continue throughout the year? Can it continue to impact prices?
The combination of a smaller, low-quality crop in the Asian giant and smaller crops in its more "common" suppliers (Australia and Canada) should keep Chinese demand for US wheat strong. However, the drought in the Panama Canal poses an important risk to this scenario.
In addition, other fundamentals may encourage speculators to continue reducing their short positions, such as the delay in planting in France and the estimate of tighter global stocks published in the latest WASDE.
Wheat: Chinese demand should continue to support prices
The last two weeks have brought some interesting new fundamentals to wheat markets, most of them with a bullish bias. Among these new fundamentals, Chinese demand certainly stands out the most.
Chicago wheat hit 4-month highs at the beginning of last week, and this rise was greatly influenced by large purchases of US Soft Red Wheat (SRW) by China. The USDA confirmed bookings of more than 1M mt to China at the beginning of last week, the largest volume of sales in a week to the Asian country since July 2014 and close to the largest weekly quantity ever recorded.
With these significant movements, new questions arise. Will this demand continue throughout the year? Can it continue to impact prices? This report aims to provide some guidance on these questions.
Fig. 1: Wheat Seasonal Imports - China (M mt)
Fig. 2: Wheat S&D balance - China (M mt)
Chinese demand will likely remain strong
China is on course to import almost record volumes of wheat this year, following a poor harvest and a rise in domestic prices.
The country's wheat crop fell to 137M mt in 2023/24, slightly down on last year and the first drop in five years. The abundance of rainfall in the country's main wheat-growing regions before harvest substantially reduced the quality of the crop, Leading to an unusually large percentage of the crop to be used for animal feed.
This year, domestic wheat prices in China began to rise at the end of July and surpassed those of corn and rice by mid-August. As a result, the country's wheat imports soared in 2023, with totals for the first nine months of the year increasing by 64% compared to the same period last year. However, looking at the accumulated figures, there is still room for a strong import pace to continue.
Demand should be directed to the US
The increase in Chinese demand this year comes at a time when the global supply of wheat has been restricted by extreme weather conditions. Australia, which is China's main source of wheat imports, has been facing its own production cuts resulting from drought exacerbated by the El Niño.
The crop in Canada, another of China's main wheat trading partners, has also suffered this year from drought and extreme temperatures. Historically, France and the US are other countries with a significant share of the Chinese market, but the former had a smaller harvest vs. 22/23 and the already pessimistic projections for the 24/25 harvest in France due to the delay in planting are likely to harm the competitiveness of French wheat in the coming months.
As a result, the US should continue to be the main alternative for Chinese imports throughout the 23/24 harvest, given its good crop - especially SRW, which has been the main type bought by the Chinese
Fig. 3: Wheat Cumulative imports - China (M mt)
Fig. 4: Main Import Origins - Wheat China (M mt)
However, it's important to note that the drought in the Panama Canal - one of the main export route for American grain to Asian markets - could have an impact on the competitiveness of US wheat.
The Panama Canal Authority has restricted boat transits this fall, as a severe drought has limited the water reserves needed to operate its lock system. Currently, only 22 transits a day are allowed, compared to around 35 under normal conditions.
The restrictions will probably continue to prevent grain transport until 2024, when the region's wet season could begin to recharge the reservoirs and normalize transport in April or May. In February, transits will decrease even more, to 18 per day.
Fig. 5: Speculator positions - SRW wheat (lots)
Fig. 6: Global Ending Stocks – Wheat (M mt)
If the market continues to react to Chinese demand for US wheat as it did last week, price support should remain strong throughout the 23/24 crop year. The combination of a smaller, low-quality crop in the Asian giant and smaller crops in its more "common" suppliers (Australia and Canada) should keep demand for US wheat strong. However, the drought in the Panama Canal poses an important risk to this scenario.
In addition, other fundamentals could push speculators to continue reducing their short positions, as happened in the latest CFTC report. It is already virtually certain that the delay in planting in France will lead to a reduction in the area planted and last Friday's WASDE report brought a further cut in global stocks.
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