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Happy New (Marketing) Year, US Winter Wheat!

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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DTN National Average HRW Wheat Basis chart for 2015-16 crop year. (DTN chart)

Too much of a good thing isn't always a good thing. That was pretty much the case this past year after the U.S. produced a large, good-quality, high-protein hard red winter wheat crop. The rest of world also produced a large crop. Not all of it was as good as the U.S. crop, but there was still plenty to go around. The end result was a cheap basis for U.S. HRW wheat most of the crop year.

U.S. Wheat Associates reported that in 2015-16, wheat farmers across 16 states grew a crop that "provided the characteristics buyers need to meet the growing global demand for high-quality baked goods and other wheat foods. Even though less was seeded, farmers produced more HRW than in 2014-15."

The average grade for last year's crop was U.S. No. 2 due to the test weight average of 59 pounds. A No. 1 grade requires 60 pounds. The average dockage was 0.8% and total defects were 1.8%. Best of all, the average protein was 12.4%. Approximately 22% of samples tested were less than 11.5% protein, 41% between 11.5% and 12.5%, and 37% above 12.5%, according to the 500 samples from the 12 states making up the Gulf and Pacific Northwest tributary regions collected by USW and its partner organizations.

The crop was sound, coming in at an average of 400 falling numbers. Falling number measures the effect of the enzymes on wheat quality in flour or meal. It also measures if there is any sprout damage. Falling numbers below 200 are a sign of severe sprout damage and unacceptable for milling. Mills require a 300 FN or better to be considered for flour milling.

OLD-CROP BASIS WEAKER FOR MOST OF YEAR

The DTN National Average Basis held above the five-year average through November 2015, then dropped below and stayed there for the rest of the 2015-16 crop year, ending the year at an average of -56 vs. the prior year average of -40.

Alex Basset, a risk management consultant at INTL FCStone Inc. in Kansas City, Missouri, told DTN in an email, "HRW basis was weaker than normal as we had little export demand of any kind." If you followed weekly export sales and weekly inspections for last year, you would have seen the world "dismal" used over and over again when summarizing the weekly reports.

Dan Maltby, a former HRW buyer in Kansas City and currently a consultant for Risk Management Group Minneapolis, told DTN 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."

For most of the last crop year, Maltby added, "U.S. wheat exports were also negatively impacted by a relatively strong dollar, especially when compared to other wheat exporters, but this has recently moderated somewhat. Still-cheap wheat prices at harvest time again sink to be competitive with corn feeding."

WHAT WILL NEW CROP YEAR BRING?

In the May 10 USDA WADSE report, U.S. HRW production, projected at 863 million bushels, was up 4% from a year ago. The U.S. all-wheat 2016-17 carryout was projected at 1.0239 billion bushels, up from the current 2015-16 estimate of 978 million bushels. If realized, it would be the highest carryout seen since the 1987-88 crop year. Foreign wheat carryout for 2016-17 was projected at a new record of 257 million metric tons, up 14 million metric tons from the current 2015-16 estimate. Production was put at 727 million metric tons, down from last year's record of 734 million metric tons, but if realized, would be the second-largest production number in history.

So far in this new crop year, there has been strength in HRW wheat basis, but mainly for 12 proteins. All buyers of milling quality are concerned that new-crop HRW wheat will be lower protein. Basset said, "Early harvest results out of Texas and Oklahoma are showing good test weight and good production with below-normal proteins as a result of good moisture and cool temps, which will likely be the case across the Plains. There is still a lot of low test weight off quality wheat around from last year, which should keep spreads wide, and wide spreads incentivized commercials to carry wheat."

USW reported on June 3 in their weekly harvest report that the 2016 HRW wheat harvest continues to be slower than normal and struggling to make significant progress due to relentless rain across Texas and Oklahoma. "Texas harvest is 18% complete. Wheat in central and northeast Texas has been mature and ready to cut for a couple of weeks. Some wheat has been cut in coastal areas and west-central Texas, but moisture has kept combines out of most fields. Wheat throughout Oklahoma has now been ready to cut for several days, but harvest progress has also been delayed by moisture in the fields. Test cutting has been reported as far north as the Oklahoma/Kansas state line. The weather forecast is for dryer conditions early next week. This could allow harvest to begin from central Texas to southern Kansas. Early test weight reports continue to be very good and producers are pleased with the yields. Early protein reports continue to average about 11.5%."

"As we head into a new year, while U.S. export projections are somewhat improved," Maltby said in an email. "Argentina's wheat crop had problems, Russian Ruble has risen, Canadian wheat stocks will remain tight; very wide carrying charges in KC (73 cents from July '16 to July '17) and a cheap basis indicate the best marketing option for producers and wheat handlers alike is to store as much wheat for as long as possible."

Basset added, "We saw a new-crop barge to Brazil in export sales Friday and could see this continue. It all depends on quality of the Argentine crop, and we will need to watch the crop in the Black Sea as they have exported wheat to Brazil as well."

"We are staring at another large crop, which will likely keep new-crop basis under pressure unless we have quality concerns or bump in exports," Basset continued. "It will be tough for the U.S. to see a major increase in exports as the U.S. dollar stays strong; we will need to see quality issues elsewhere to have a better chance."

Informa Economics on Friday released its latest U.S. survey-based crop production estimate, increasing its winter wheat production forecast by 21 million bushels from 1,427 million bushels to 1,448 million. "The bulk of the increase was for HRW wheat production, which is forecast at 882 million bushels, up about 19 million bushels from USDA's May forecast. No demand changes were made to the U.S. 2016-17 balance sheet. The additional supplies fell to ending stocks, which now are forecast at 1,115 million bushels for the 2016-17 crop year."

Maltby said, "The most interesting question on the horizon then is ... will U.S. wheat acreage decline again? If it does not, then it suggests wheat must be used in some rotations, no matter what the price, and of course if that's the case, wheat prices' only hope of a rally is tied to something other than wheat demand. IF acreage drops, and producers continue to switch to oilseeds or corn, or try something 'new,' like pulses, then possibly the stage would be set for production to be less than demand."

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

Follow Mary Kennedy on Twitter @MaryCKenn

(CZ/AG)