As the winter wheat crop year came to an end on May 31, 2017, hard red winter wheat basis levels tried to stage a comeback from near-historic lows all crop year. The DTN National Average Basis chart shows what a rough year it was for the HRW wheat basis that hung well below the minimum five-year average for the 2016-17 crop year.
And, it wasn't just the basis that suffered lower prices. The cash prices for the crop year briefly fell below the HRW loan rates for counties in Kansas, where loans on 1.96 million bushels of HRW wheat are outstanding, as of April 30, 2017, according to the May 12 USDA Economic Research Service (ERS) Wheat Outlook.
As for basis, one would think that due to the lower-protein crop the U.S. produced in 2016, the basis would have been stronger throughout the year. The 2016 crop average protein was 11.2% versus the 2015 crop average of 12.3%. However, mills were able to find a way to use the lower protein by blending with higher-protein spring wheat or higher-protein old-crop winter wheat.
In June of 2016, Dan Maltby, a former HRW buyer in Kansas City and currently a consultant for Risk Management Group Minneapolis, told me that "One of the things ailing winter wheat is that world wheat production continues to outstrip world wheat demand, and U.S. ending stocks bore the brunt of that. Big old-crop stocks, widely believed to be 12% pro[tein] will help the 2016 11.2% protein crop." This past week, Maltby told me that low protein is getting cheap enough to find homes due to very wide Kansas City carrying charges, always at full carry, and export prices finally cheap enough to compete with Black Sea. "The 'good news' about low-protein HRW is that it's cheap and at current prices, actually quite competitive on the world market."
The cheap cash prices were not lost on U.S. wheat farmers, who responded by planting fewer acres last fall. USDA estimated in January 2017 that all winter wheat seedings were down 10% from the previous year, and if realized, it would be the second-smallest U.S. winter wheat acreage on record and the lowest in more than 100 years.
WHAT WILL THE NEW-CROP YEAR BRING FOR PRICES?
In the May 2017 ERS Wheat Outlook, the report noted that, "Record-low winter wheat plantings combined with newly reported harvested area and yield forecasts, continue to indicate a sharp decline in winter wheat production. Winter production, recently affected by adverse weather in the eastern Plains, is projected down 25% from the previous year."
Mike O'Dea, a risk management consultant at INTL FCStone Inc. in Kansas City, Missouri, told me, "The HRW market is now focused on harvest as smaller planted acres will see the yields and quality the main feature. Early harvest results in Texas and Oklahoma have seen lower proteins, but quality has been good with high test weights. But, this has seen the domestic premiums continue to stay strong with the KC milling market showing bids for 11 pro at 25 over, but 12s at 110 over and 13s at 155 over. This shows how the current market structure in place, along with the MGX/KC spread blowing out to +140, should continue to keep HRW premiums firm, in theory. But we all know how theory works in the grain business."
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"Low-pro HRW does continue to find Gulf business, and the U.S. is competitive in the current market environment and should continue to be unless we see a significant flat price rally," O'Dea added. "The most interesting thing about the export market is the July/August/Sept FOB (free on board -- the buyer pays for transportation of the goods) Black Sea values continue to firm; basically, the cheapest wheat in the world is moving higher in price. Trade will continue to focus on the U.S. Northern Plains and Canadian prairies as a smaller U.S. HRS crop will see balance sheets tighten significantly, moving back toward carryouts to use that we have not seen since 2007-08, and we all know what happened then."
I asked O'Dea if he thought the CME decision to implement a variable storage rate (VSR) mechanism in its KC March 2018 HRW wheat futures would affect prices. He told me he thinks we will see a higher basis this year than last for the producer due to the smaller crop. And, unless prices move to levels that incentivize the producer to plant more, "Wheat acres will continue to decline and VSR will solve itself through smaller overall production and carryouts being reduced."
"In the long run, we may look back and see the rule of unintended consequences being unleashed upon the market as KC will now mirror the CME contract in all aspects, which includes the CME storage rate (lower than KC) and the harvest storage premium from July through December will go away," he added. "Also, we now go to a dynamic environment versus a static one, which brings uncertainty; and the one thing the markets do not like is uncertainty. We like volatility but not uncertainty, and that is what you get with VSR."
WEATHER, DISEASE HURT KANSAS NEW CROP
USDA in January said that HRW winter acreage would be 12% lower from the prior year. Since that prediction, a spring blizzard flattened the winter wheat crop in western Kansas and the Oklahoma Panhandle over the weekend of April 28. Pam Smith, DTN/The Progressive Farmer crops technology editor, attended the 2017 Wheat Quality Tour, which took place shortly after the blizzard. She noted in her final report from the crop tour that, "This year's hard red winter wheat tour was a rubbernecker compared to the previous year. The tour estimated total production would come in around 382.4 million bushels. Scouts estimated Kansas yields will come in at 48.6 bushels per acre. That's a big crop when compared to the 35.6 bpa estimate from the 2015 tour and a 37 bpa actual final yield last year. However, the crop still has six or more weeks to go and, as scouts were continually reminded, a lot of things can happen between here and harvest, and most of them are bad."
Smith added that the organizers said estimated averages this year might have been slightly skewed toward central Kansas since scouts were not always able to draw a sample in snow-capped regions. "Also the reduced number of wheat acres sometimes made it difficult to actually find a wheat field in some regions," Smith wrote.
USDA NASS reported that, as of May 28, the Kansas winter wheat crop condition was rated 9% very poor, 16% poor, 30% fair, 38% good and 7% excellent. On top of the damage done by the late-April blizzard, hail in northwestern Kansas damaged some of the new-crop wheat during the week ending May 28. One year ago, the picture was much brighter with the crop rated 1% very poor, 7% poor, 32% fair, 50% good and 10% excellent.
If the weather-related damage wasn't enough, the Kansas wheat crop has been infected with wheat streak mosaic virus (WSMV). The worst area is in western Kansas, according to KSU, and some fields have been abandoned because of the disease. WSMV can affect yields and/or will cause the death of the entire crop. Kansas Wheat said in an article about the disease that WSMV is "crippling" the western Kansas wheat crop.
DROUGHT RETURNS TO THE NORTHERN PLAINS
While most people don't think of the Upper Midwest as "winter wheat country," those states can play an important part in the overall average of the crop quality and protein, especially if the Southern Plains states have a rough year as far as protein and quality goes. However, they may not be able to help out much this year.
NOAA reported that during the week of May 23-30, conditions were quickly deteriorating in the Dakotas and eastern Montana. Nearly 25% of North Dakota was reported to be in a moderate drought, with the areas where winter wheat is grown some of the driest in the state.
In South Dakota, a promising crop was downgraded as drought conditions exist in the north-central region where rainfall in the last two months is at least half of average. As of May 1, USDA estimated only 87% of the 900,000 acres of winter wheat previously estimated by NASS that were planted in fall of 2016 in South Dakota will still be around by harvest in July. That means the 780,000 acres estimated to be planted in South Dakota would be the lowest in 46 years.
But, according to reports this past week of winter wheat acres already being zeroed out in South Dakota, that total acreage number will likely not be realized. Tim Luken, manager at Oahe Grain in Onida, South Dakota, told me that, in the past week, he has heard from farmers that 40% to 60% of the winter wheat combined from Pierre, Onida and Harrold has been "sprayed out" (terminated) due to poor stands that adjusters had estimated may only yield 5 to 10 bushels. And that may just be the beginning."
So, it appears that U.S. new-crop winter wheat acres, already at a historical low, may be even lower yet. Given that possibility and the possibility of another low-protein crop and maybe poor quality harvested, HRW winter basis may have something to look forward to in the new-crop year.
Mary Kennedy can be reached at email@example.com
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