Cash Market Moves

New Crop, New Year for Winter Wheat

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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The HRW wheat basis performed well over the past crop year as can be seen here on the DTN national average basis chart for 2017-18.

What a difference a year makes. When I wrote the 2016-17 year-end story for hard red winter (HRW) wheat, the DTN national average basis chart had a completely different look than the 2017-18 chart. The basis for 2016-17 was dismal as it stayed well below the DTN five-year minimum average basis for the entire crop year. Between August and January of that crop year, basis was at historic lows.

As you can see by the attached chart, the 2017-18 crop year started out well above the prior crop year and ended higher than the DTN five-year average basis. In the Jan. 12 NASS planting report of winter wheat in 2018, acres were estimated at 32,608,000, which represented the smallest winter wheat-seeded area since 1909. Planting delays in the fall of 2017 was one of the reasons for the lower acreage, which became a boost for premiums.

The 13% protein basis levels were historically strong while basis for ords (10% and lower) were relatively weak during the past year, as the 2017 new-crop harvest produced an average protein of 11.4% on top of a 2016 crop protein average of 11.2%. The premium spread remained wide due to an abundance of lower protein HRW wheat available versus higher protein wheat. Mills had to get creative to make the blends needed for flour, and while they could also use spring wheat, it too was expensive, just like the higher protein winter wheat.

As the new-crop year approached for HRW wheat, the basis spread between 13% protein and ords has weakened from recent highs. Depending on the weather conditions between now and the end of harvest, that spread could weaken even further from current levels.

According to Informa Economics, "For the spread to maintain near-current levels, basis quotes for ords and 13% would need to generally move together. The wideness in the spread in 2016 and 2017 was due to both a weakening of ordinary basis quotes and a strengthening of 13% quotes. On average, for the 2018-19 crop year, the spread between HRW 13% and ordinaries is forecast to average about 50 cents. If realized, the average spread would be down from 2016-17 and 2017-18 levels."

In their June 8 weekly wheat harvest report, U.S. Wheat Associates noted an average so far of 13% protein with harvest still in early stages. "The 2018 HRW harvest raced northward over the past week into southern Kansas, slowed only by locally heavy rain June 7 across areas of north-central Oklahoma and southeastern Kansas. The Texas harvest is now 39% complete and Oklahoma's harvest is 51% complete. Yields continue to be variable with a current average estimated at under 25 bushels per acre (1.7 tons/ha). Hot temperatures forecast for next week should push maturity."

What Lies Ahead for HRW Wheat Prices?

I asked Dan Maltby, a former HRW buyer in Kansas City and now a consultant for Risk Management Group in Minneapolis, for his insight into the year ahead. While we are very early in to the new year and don't have a firm grasp on new-crop quality and protein, some things always seem to be constant.

"Never forget nobody can pay more for wheat than a miller" appears to be the theme of this upcoming year, said Maltby. "Translation: In a supply-constrained year, basis will be firm, as millers will be reluctant to let supply get away easily."

"As mills force the market higher, that forces terminals to pay up, which would make exporters pay up; IF they had to do some business, which so far, they do not. Assuming all of this was foreseen, then that would explain the local cash bid basis rising 85 cents in the past six months," added Maltby. "It's certainly not due to exporters, as we've seen the posted gulf bids for 12% pro drop 60 cents in the same time."

Maltby said that particular spread has moved $1.45/bushel, "which of course is indicative of the collapse of protein premiums, which may help explain the collapse of the Minny/KC futures spreads, which leads into big spring wheat acreage increases in North Dakota and Canada."

An interesting question is there are so few HRW wheat bushels coming, will it force a narrowing of the Kansas City calendar spreads? "I lean towards not," said Maltby. "UNLESS of course, Brazil actually becomes a significant buyer of U.S. HRW wheat, which would only happen if Argentina's drought is severe enough and Argentina goes ahead with a 10% tax on wheat exports."

Maltby said he wonders if these HRW prices are now good enough to cause an uptick in U.S. HRW wheat acres, and if so, will these winter wheat prices be "sustainable"?

"Unfortunately," he said, "that question is better answered by the answer to this question; will Black Sea fob quotes stay at $205/metric ton, or will they next year sink again to $170 sellers?"

As usual, our export business relies on us being cheaper than everyone else and more times than not, it is a tough playing field for the U.S. Informa Economics reported that, "For the U.S. to have an export program that notably exceeds 900 million bushels, a significant production cut likely would be needed for Russia. But, expectations are that much of the business would switch to the EU."

The Northern Hemisphere largely is in its growing and planting seasons for winter and spring wheat, which, with adverse or favorable weather in the coming weeks, could change the supply and the price outlooks, added Informa Economics.

In the U.S., the June 3 USDA Crop Progress report showed 9% of the U.S. winter wheat was harvested, as harvest is still in its early stages. Conditions slipped a little with 14% of the crop rated very poor, 21% rated poor, 28% rated fair, 29% rated good and 8% rated excellent.

Until the U.S. and Northern Hemisphere new-crop bushels are harvested, graded and in the bin, hopefully escaping any serious weather issues between now and then, the cash price for the new year remains unpredictable.

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

Follow her on Twitter @MaryCKenn

(BAS/SK)