Kub's Den

The slow progress and overall lateness of grain crops persists into the late summer of 2019, with the plants never really catching up after their inauspicious start. As of Aug. 25, we've got the nation's corn crop reaching its dented stage at 19 percentage points behind the five-year average pace; soybeans setting pods at 12 percentage points behind the average pace; and sorghum reaching maturity at 8 percentage points behind the average pace.

Nothing is quite as late as spring wheat harvest, though -- pegged at 27 percentage points behind its average pace, with only 38% of the crop cut, gleaned and delivered to a bin by this past Sunday. Minnesota -- notably two-thirds harvested by this time of year -- has only brought in 15% of its spring wheat crop so far. This pace is 10 days behind normal -- the combines one would usually observe on Aug. 15 weren't running until Aug. 25, delayed by some scattered showers but mostly by a slow crop that just wouldn't dry down.

Not that this has had any effect on prices. Perhaps the headline of this piece ought to be: "Hard Red Winter Wheat Below $4 Per Bushel," because it is this week, and that's a rare feat the KC wheat futures market has only attempted a few times in the past decade. The chart dipped that low in mid-May, alongside corn's recent low, and dabbled there off and on during 2016 and 2017.

In cash market terms, it looks even grimmer. The DTN Hard Red Winter Wheat Index, at $3.81 Monday, hit its lowest price since December 2017. Basis bids across the state of Kansas this week are mostly ranging from 20 cents under the September futures contract to 50 cents under the September futures contract after the state experienced a season of abundant precipitation, phenomenal yields and test weights. I don't think many High Plains wheat farmers would trade 2019 for the recent drought years (but some protein traders might).

DTN Lead Analyst Todd Hultman pointed out in his column on Aug. 23 (https://www.dtnpf.com/…) that wheat's prices tend not to have any observable relationship to the crop's own inventory levels. I've also tried in the past, in vain, to untangle historical wheat charts and identify a predictable seasonal pattern. If wheat prices don't care about supply, demand or seasonality, we can certainly assume they don't care about a late harvest, especially when those late harvesters are eventually bringing in heavy yields.

However, the markets that make up the overall grain sector do tend to move together, so we can look at wheat's relationship to the price of corn and get a sense if wheat is unusually cheap or expensive in those terms. The benchmark Chicago wheat futures contract is perhaps the best representative of the overall wheat market's relationship to corn, since soft red winter wheat is the closest cousin to corn in livestock feed rations. Larger portions of the hard red spring wheat market (traded on the Minneapolis Grain Exchange) and the hard red winter wheat market (traded via KC wheat futures on the CBOT) eventually end up being milled into flour for human consumption, so in theory their price changes would have more varied influences than corn and other feed grains.

Currently, the Chicago wheat-to-corn price ratio is well within the range of normal expectations. With nearby wheat futures closing Tuesday at $4.74 and nearby corn futures closing at $3.57, the wheat is worth 1.32 times the price of the corn. For real buyers approaching the cash market to compare feed grains, the ratio is almost identical. It compares to a 10-year average price ratio of 1.25-to-1; so, if anything, we might judge that wheat is a little overpriced in relation to corn, but a one-standard-deviation range through the past decade keeps the ratio anywhere between 1.10-to-1 and 1.40-to-1.

If we were going to construct a wheat trade entirely based on historical price relationships, the most obvious target would be the arbitrage between underpriced KC wheat futures, which used to have a premium over Chicago wheat futures because of the higher protein content in that variety of wheat. Today, hard red winter wheat is priced at an 18% discount to the benchmark Chicago wheat market. However, this scenario has persisted off and on since 2015, and has only deepened through 2019 and the historic abundance of new-crop wheat supplies.

Anyone waiting for a nice, predictable movement from the wheat market may end up waiting a very long time.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.comor on Twitter @elainekub.

(BE/AG)

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