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Wheat market and supply
After back-to-back record
production years in 2008 and 2009, world wheat output is forecast to drop this
year by 5.3% from last year, to 646 MMT. Likewise, ending stocks are forecast
to drop 10.2% to 176 MMT, after surging to near-record highs just a year ago.
Usage, however, is expected to increase 2% to 666 MMT.
The sudden production drop
is largely attributed to the severe drought that ravaged the Black Sea region
this past summer. Russian wheat production dropped to just 41.5 MMT, 33% lower
than last year; and their exports will be just 4 MMT, down 78%. Both are their
lowest levels in seven years. The Black Sea region had become the world’s
largest wheat exporter, led by Russia. However, this year total Black Sea
production is down 27%, exports are down 54%, and Russia will be forced to
import an estimated 4 MMT of grain just to meet domestic needs.
While on paper it looks like
world wheat stocks may still be adequate, it’s actually a much different story
when you separate the feed wheat from milling wheat. For feed wheat the
supplies are plentiful, a stark contrast to just four months ago following the
Black Sea embargo. The poor-quality harvests in the U.S., Europe, Canada, and
now Australia have filled that feed wheat void.
Wheat Countries Stumble
The U.S. had its second year
in a row of near-ideal growing conditions in the Northern Plains, giving
another year of large yields but low protein in much of spring wheat country
and some winter wheat regions.
Europe was on track for
great production but ran into heavy rains at harvest in the key regions of
Germany and France, resulting in significant quality downgrades.
Canada struggled all season
long with too much rain across wide swaths of the prairies. Plantings were
severely delayed or prevented and then a wet harvest rendered much of Canada’s
spring wheat as feed grade, something they rarely have to consider.
Australia also had a
difficult summer with drought in the key western growing region and too much
rain in the east. The abundant rains in the east were welcome through the early
stages of the growing season, as yields looked great and production estimates
soared to record levels. But the rains never stopped as the wheat ripened, and
harvest became delayed by as much as five weeks, resulting in major flooding
and sprout problems. What started as a beautiful, high-quality record crop was
reduced to feed wheat with some fields even being abandoned.
If you were going to have a
low-quality crop, this was the year to do it. The low-grade wheat – normally
selling under heavy discounts and struggling to find a home – now had huge
demand and strong prices.
The U.S. and European Union
were quick to meet the sudden burst of demand from several countries who
had contracts cancelled from
Russia and Ukraine. The torrid pace of sales from Western Europe has all but
depleted the United Kingdom’s stocks and put France on track for record sales
with their stocks dropping extremely low as well.
The U.S. saw export sales
jump 55% above last year’s pace, putting us on track for our best export year
in three years and second best in eighteen years at a projected 1.25 billion
bushels. All this and we are only half way through the marketing year.
Wheat futures prices
exploded higher through the month of July as the Russian drought spread,
topping in dramatic fashion in early August, followed by a sharp sell-off. But
the Australian harvest problems have stoked those burning embers, and prices
for the quality markets of Kansas City and Minneapolis futures have rallied to
new highs with Chicago retesting its August high.
The cash markets didn’t
follow the sharply higher futures during the summer. The basis fell during the
sharp futures rally. Since then, the basis not only has recovered but also is
moving higher in addition to the higher futures, thus, taking cash levels for
high-protein springs and winters to new highs for the year.
The world had been counting
on good- quality wheat from Australia to bridge the gap until the Northern
Hemisphere’s new crop, but that will not happen. Argentina, which has received
very little press about its crop, is actually harvesting a good-yielding and
good-quality crop, but most of their exportable supplies have already been
committed, mostly to Brazil.
The shortage of quality
wheat in the world has been an ongoing story for over a year. The shortage
won’t be resolved until next summer at the earliest – possibly with the winter
wheat harvest but most likely with the spring wheat harvest.
The premiums for
high-quality wheat would logically remain strong until that time as well.
Although no two years are identical, historically, in years of tight supplies
of milling-quality wheat, premiums tend to get even stronger later into the
marketing year. That would take us to the late May/early June time window.
Quality Concerns Up Price
Unfortunately, it is nearly
impossible to hedge the high-quality wheat in the futures market. Most of the
dynamics will likely take place in the cash markets through the basis with the
premiums and discounts.
That said, it would stand to
reason that Minneapolis and Kansas City would at least retain their premiums
over Chicago and could easily extend those spread premiums as long as quality
supplies remain tight.
Although deliveries on both the Kansas City and Minneapolis
markets can be below the milling grade preferred by the industry, the buying
pace in those markets is keeping a solid base of support in both the futures
and the spreads against the Chicago wheat contract.