Market Matters Blog

HRW Wheat Basis Well Below Five-Year Average

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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DTN HRW Wheat National Average Basis weekly chart shows HRW basis well below the five-year average. (DTN graphic by Nick Scalise)

If you take a good look at the chart accompanying this column, you will see that the weekly DTN National Average Basis last week continues to hover well below average five-year values. It started out the new-crop year slightly above the minimum five-year average, but took a turn for the worse before the end of June and has never recovered.

Simply put, there is too much wheat in the world, including here at home. As global stocks continue to grow, usage can't keep up with the pace at which supplies will increase globally. The Nov. 14 Economic Research Service (ERS) wheat outlook reported that world wheat production in 2016-17 is forecast at 744.7 million tons, up 0.3 mt, and 9.2 mt ahead of last year's record.

On Nov. 9, the monthly USDA WASDE report raised global wheat supplies for 2016-17 to 1.7 mt on a 0.3-mt production increase and higher beginning stocks. The largest beginning stocks change is for Ukraine on expectations of lower food use more than offsetting higher feeding.

U.S. ending stocks were raised to 1.143 billion, up 5 million bushels on a reduction in food use. By class, hard red winter (HRW) wheat food use was raised 10 mb, hard red spring (HRS) wheat food use was lowered 10 mb and durum wheat food use was lowered 5 mb.

The U.S. 2016-17 wheat for food use projection was lowered 5 mb, to 963 mb, based on the release of the USDA, National Agricultural Statistic Service (NASS) Flour Milling Products report Nov. 1 and expectations for the balance of the marketing year.

The proportional use of HRW and HRS in the mill grind was adjusted in the ERS November report. ERS noted that the 1.2% increase in HRW use versus the 0.9% decrease in HRS moves the 2016-17 wheat by class food use proportions closer to 2015-16 estimates, while still maintaining a higher-than average proportion of HRS in the mill grind.

"Above-average proportional use of HRS for flour is reflective of increased use of relatively higher protein HRS to balance below-average protein new-crop HRW in achieving target protein levels," reported ERS. "Recent strength in HRS prices couples with strong export demand to support November's slight reduction of HRS food use. Greater-than-expected use of relatively higher protein old-crop HRW puts further downward pressure on HRS food use in the first quarter and favors a slight expansion to the annual projection of HRW for the same category." Feed-quality and lower grades of wheat are abundant in the world and are currently priced competitively to corn. Thus, premiums for higher-quality wheat grades are rising.

Alex Bassett, risk management consultant for FCStone, LLC, told me that "Some mills we have spoken with are covered on wheat purchases well into March for some locations. In terms of blending, some HRW mills are using between 20% to 30% of HRS in their blend to hit the needed protein specs. So, this will hurt the domestic basis values for HRW; however, we have seen basis levels begin to firm for the export market for 11% and 12% pro wheat as U.S. HRW is the cheapest wheat in the world. However, you will see more HRW in the grinds in general and less HRS just due to the Minneapolis-Kansas City spread."

FEWER US PLANTED ACRES THIS FALL

Informa Economics IEG recently updated its 2017 acreage projections saying, "Based on its November winter wheat planting survey (the third of the season), IEG projected winter wheat plantings at 33.8 million acres, which would be down 7% from a year ago and about 1.7 million lower than IEG's previous report. Hard red wheat acreage was projected at 24.6 ma, which was nearly 1 ma below IEG's October update. Soft red wheat acreage was reduced 545,000 acres from last month to 5.7 million, and winter white was projected to total 3.4 ma, which was 115,000 below IEG's October report. IEG forecast the 2017 winter wheat harvest at 1,326 mb, which, if realized, would be 345 million below last year."

Bassett and other analysts I spoke to about their thoughts on the reduction in planted winter wheat acres agree that we will see at least 7% to 10% fewer planted acres than last year.

Angie Setzer, vice president of Grain Citizens LLC in Charlotte, Michigan, told me that in her neck of the woods, she expect planted acres to be down significantly versus last year. "Producers were already planning on planting less year-over-year due to unfavorable market conditions, but poor weather throughout October and well in to November has forced the hand of many growers with some choosing to claim prevented planting. What has been planted looks OK, but the extended pattern of warm weather has allowed some of the earlier-planted stuff to grow beyond what is considered an optimal level for winter dormancy."

USDA will release its final 2016 winter wheat seedings report Jan. 12, 2017. Then, we will patiently wait for spring to arrive and watch as wheat comes out of dormancy and begins to start living its nine lives until harvest. In the meantime, producers are faced with cheap basis levels and low futures, which makes for an unattractive flat price for now.

Mary Kennedy can be reached at mary.kennedy@dtn.com

Follow Mary Kennedy on Twitter @MaryCKenn

(AG/ES)

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