Canada Markets

A Look at the HRS/HRW Wheat Spread

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The brown upper line represents the spread between DTN's HRS and HRW cash indices, while the blue line in the lower study represents the continuous active HRS/HRW future spread. Both are in sharp decline since September highs. (DTN ProphetX chart)

While both hard red spring wheat and hard red winter wheat futures both finished lower on April 16, a look at the respective charts shows a stark difference in the trend for these markets. The nearby HRW chart shows the April 16 low finding support at this week's low while holding well-above the April low, while the low on the spring wheat May chart shows this contract destined to test the March contract low at $5.03/bu. This level represents the double-bottom formed on March 12 and March 16.

Historical DTN analysis has looked at the hard red spring/hard red winter wheat spread as a potential signal of the demand for higher protein wheat. The wider the spread between the two, the more that buyers are willing to bid up prices on the higher protein hard red spring wheat relative to the lower protein winter wheat.

Since September, the trend shows this spread narrowing or weakening, as seen on the attached chart, on both cash markets (upper study) and the futures market (lower study). The U.S. cash market index shows that since reaching a weekly high of $1.23/bushels USD (HRS over HRW) in September, the widest spread reported since April 2018, this spread closed at $0.46/bu. as of the April 15 close. This is the weakest spread seen since the last week of December 2018. Support on the spread chart is seen at $0.44, which is the last level of support preventing a slide to the August 2018 low of $0.137.

The continuous active futures spread shows even a steeper decline, with the April 16 spread ending at $.2950/bu., down 79% from the September 2019 high of $1.3950. The next level of chart support is seen at the August 2018 weekly low of $0.1650/bu.

Despite concerns of late planting in the northern states, the market is showing little concern. The latest USDA WASDE report includes an estimate of 2019-20 U.S. ending stocks of hard red spring wheat at 250 million bushels (6.8 million metric tons) which represents 42.7% of use. This represents a marginal improvement from the estimated 263 mb carried out of 2018-19, which represents 45.1% of annual use. While no one knows what 2020-21 will bring, the International Grains Council has already forecast a modest increase in global production of all-wheat. Dow Jones reports European analyst Strategie Grains is forecasting that COVID-19 lockdowns will weigh on European cereal grain demand in 2020-21, with a slow return to normal economic activity expected after the lockdowns are lifted.

When this week's price data is considered (April 13-15), the cash spread between No. 1 CWRS 13.5% protein wheat and No.1 CPRS 11.5% protein wheat reached a range from $17.55/mt to $18.44/mt across the three regions reported for Alberta, the narrowest spread seen since July 2019. This is the narrowest or weakest spread (CWRS over CPRS) realized this crop year, while well below the crop year high which showed a range of $50.73/mt to $52.18/mt across the three regions on Sept. 25.

Over the past five years, Statistics Canada data for Alberta shows the average yield for Canada Prairie Spring wheat (red and white combined) at 66.7 bushels/acre, as compared to the five-year average for hard red spring wheat at 51.5 bpa, or 29.5% higher on average. When combined with the shrinking price premium for protein, Canada Prairie Spring could see increased interest this spring.


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