Canada Markets

They say we're not farming our Grandpa's farm any more. Yet another reminder of this came from Grainworld this week where speakers were unanimous that shifts in demand around the world, combined with an ample crop of protein wheat in both the Canadian and United States in 2012, has squeezed protein premiums paid to farmers. Canada has long been known for its production of its high-protein hard red spring wheat, although times are changing.

"Wheat is not (just) wheat, it's very complex," said Lawrence Yakielashek of Toepfer Canada. Increase in demand from regions of the world such as Asia, due both to population growth along with income growth, have shifted preferences to the medium quality wheat class for making end-products such as noodles. Yakielashek suggests that based on projections for Canadian production in 2013/14, after taking into account for 8.6 million metric tonnes of domestic use, while ending with a 4.4 million metric tonne carryout, some 15 mmt of product are available for export. Of this, only 6-7 mmt will be sold into markets paying premiums for high protein.

Trends in wheat protein can be seen in the attached chart of the Minneapolis HRS/Kansas City HRW wheat spread. The black line represents the spread, or difference between HRS and HRW, in the old-crop May futures, while the red line tracks the new-crop December spread. This spread represents the relative fundamentals for the two classes of wheat, but can also be looked at as an indicator for the value placed on protein, or the price of 13.5% hard red spring wheat as compared to the lower 11% protein found in hard red winter.

The old-crop spread has been in a downtrend over the life of the May contract, as seen by the blue trendline which connects the peaks in April and July of 2012. While some recovery has taken place above the November low of 21 cents, the recent climb has stalled this week with the spread giving up 3 cents to end the week at 49 cents/bushel. A move through the blue trend line will be required to indicate a change in trend for the spread.

The new-crop spread, as shown by the red line, indicates a similar story to the current year. The average of the spread between the HRS wheat and HRW is 28 1/2 cents over the life of the new-crop December 2013 contract, with this week's spread ending at 27 cents. It will take a shift in the supply and demand balance somewhere in the world to return to premium prices for the production of protein wheat.

It was suggested at the conference that protein must now be viewed as a commodity and like any other commodity, faces the forces of supply and demand. It was mentioned that the central-desk marketing model in Canada has clouded market signals to producers in the past, while even the possibility that protein premium spreads have been historically manipulated to promote pool results were presented. Whether right or wrong, this year should see improved market signals which will allow producers to make more informed decisions regarding the crop varieties to grow for best results.

Both the Minneapolis Exchange and the CME have created products to help with the risk management of protein spreads, which I will expand on in the near future.

Cliff Jamieson can be reached a cliff.jamieson@telventdtn.com

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