Many consequences of quality fall

by Morton Sosland
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Morton Sosland

If one is searching for the best way to describe this crop year’s wheat market, especially from the American point of view, nothing is better than how an experienced trader said it. “If there is a story in wheat this year it’s quality and lots of feed wheat” is the succinct comment. The “story” reference is to the forces driving wheat prices. Yet, from the perception of this publication and its dedication to helping executives in milling and baking understand what accounts for moves in wheat, it is invaluable. That is particularly so in a season like this when many explanations have missed the mark.

Looking to the best guidance to make sense of price movements in 2016-17 one obvious choice centers on price spreads for hard red winter wheat in Kansas City. The spread recently between ordinary wheat and 12% protein was 103 cents per bushel, whereas ordinary wheat was only 15 cents lower than 12% protein a year ago. That current protein premium, equal to $1.85 per hundredweight of flour, is a significant cost attributed to shortfalls in protein in this year’s hard winter crop.

A conventional offset to this year’s reduced protein supply in hard winter wheat is looking to spring wheat. Alas, the lower quality problem in this year’s wheat harvest is not limited to the United States, but extends to other parts of the world that have turned to American supplies in a virtual global scramble for protein. Thus, the March hard spring contract in Minneapolis is more than $1 per bushel above the same delivery in Kansas City. In cash wheat, 14% protein spring wheat in Minneapolis trades nearly $1.50 higher than the 12% in Kansas City.

Millers seeking to meet their bakery customers’ quality requirements must search constantly for suitable supplies. That is the case regardless of the crop year, but this year’s wheat buying has been made more difficult by the dominance of grain suitable mainly for feed. Any hope that summer feed demand would reduce unusually large supplies of poor quality wheat has not been realized. Wheat feed use in 2016-17 is forecast by the Economic Research Service at 260 million bushels, up nearly 110 million from the prior season but more than 100 million short of the record feed use in 2012-13. Feed wheat demand is checked by corn prices influenced by this year’s massive corn harvest.

Quality issues in wheat this season are unusual in that they are not driven by poor growing conditions or undesirable varieties. This year’s growing conditions for hard red winter wheat have hardly ever been better. Yet, it is that positive’s role in raising yield to a new peak of 52.6 bushels per acre that weighed on futures, while creating problems for millers in buying sufficient quantities of the quality needed. It is the corn price that is posed to be the most likely influence on lower quality wheat. Early in the season corn was at a wide enough discount to act as a limit on feed wheat use. March corn in Chicago is at a discount of 54 cents to the same wheat delivery whereas that ratio should be near zero to spur wheat feeding.

Export prospects for wheat, early this season resembling the 2015-16 slow pace, have perked up. The E.R.S. forecast still lags the billion bushels that not long ago was seen as a minimum. While no one currently forecasts runaway foreign demand, poor harvests in Canada, Australia and Europe have combined to boost demand for quality U.S. supplies. World corn production for the second time will exceed 1 billion tonnes, and corn demand is at a pace holding its ending 2016-17 carryover slightly above a year ago. The global ending wheat stock is on the way to increase for the fourth year. Carryover gains are associated with price weakness. This axiom is reinforced by what has happened in wheat in 2016-17.

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