Todd's Take
A Somber Decision
$2.97 a bushel. That is the national average of hard red winter wheat prices that DTN found for Friday, August 26, gathered from over 900 locations around the U.S. In Kansas where much of that wheat is grown, most bids ranged from $2.60 to $2.80 for wheat with 11% protein.
According to USDA's estimate for the Prairie Gateway -- what USDA calls the southwestern Plains -- it cost $272.45 an acre to grow hard red winter wheat in 2015 based on land expense of $52.93 an acre.* At $2.70 a bushel, a producer would need to yield over 100 bushels an acre to break even. In Kansas, you do hear occasional reports of 80 bushel fields, but this year's average yield for the state was 57.0 bushels, says USDA, far less than what the market is demanding just to meet expenses.
DTN Senior Analyst Darin Newsom has written about the state of affairs in wheat lately and asked a tough question: Given the depressed price environment, should growers be planting wheat at all?
The numbers all currently say "no" and actually, growers did the right thing last fall when they cut back acres. U.S. wheat plantings were down 3.8 million acres in 2016 to the lowest total since 1970; 2.9 million acres of the reduction were for winter wheat, but weather commandeered this self-driving Google car right off the cliff, pushing U.S. wheat production to its highest level in eight years. Winter wheat production jumped up 21%, proving once again for wheat growers that no good deed goes unpunished.
Of course, wheat prices aren't all about what's happening in the U.S. and the global trend has also been harsh. Thirty years ago, the U.S. exported over 1.5 billion bushels of wheat and garnered nearly 40% of the world's export business. In 2016-17, USDA expects the U.S. to export 950 million bushels which will be third among the world's exporters, accounting for 15% of the world's total. In addition, world demand for wheat has under-performed population growth the past thirty years and that trend is also not likely to change anytime soon.
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Once again, producers are faced with the decision of whether or not to plant winter wheat for 2017 and for many, the decision is not easy. The last time Chicago wheat prices were nearly as unprofitable was 1998 when world ending wheat stocks accounted for 36.2% of annual use -- not far from USDA's current estimate of 34.5% for 2016-17. It will not be surprising to see U.S. plantings drop again this fall and, by all means, any producer who can find a better alternative should take it.
Wheat has been in a consistently bearish mood for over a year now, but last week's break to new contract lows revealed two unusual features in Chicago that were not previously seen. First, even though noncommercials have been net short since July of 2015, a bullish contingent emerged within that group which pushed noncommercial longs to their highest level since December 2014.
At the same time, commercials had been providing faithful support to Chicago wheat prices over the past year, adding to positions when prices dipped lower. However, that behavior changed in August as commercials gladly gave up contracts to the growing group of noncommercial longs -- a troubling (bearish) sign that commercials sensed an opportunity to re-position their holdings at a cheaper price.
Last week's plunge to new contract lows will likely succeed in washing out the bullish speculators and should be done in a matter of weeks. But the bigger problem here is that there remains no bullish argument in view to actually sustain outside buying.
For those who remain committed to planting wheat, I can't help but think of the firefighters who ran into to the Twin Towers on 9/11, falling to a knee before the priest as they entered. As an analyst, I can't sugarcoat the price outlook and it's no exaggeration to say not all producers will financially survive this bear market.
For those who can hang on, wheat will have sporadic bouts of short-covering and an occasional rotation to six-month highs is still likely in even the meanest of bear markets. There's always a chance crazy Vladimir will pop up and scare bearish traders now and then, but let's face facts -- before wheat is scattered this year, a few words with the Almighty are in order.
* USDA's Commodity Costs and Returns found at:
Todd Hultman can be reached at todd.hultman@dtn.com
Follow him on Twitter @ToddHultman1
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