With the winter wheat harvest nearly completed and the spring wheat harvest well under way, market analysts interviewed by Milling & Baking News, sister publication of World Grain, discussed decisions facing bakers in how best to approach covering their flour needs in a crop year marked by a hard red winter wheat crop with low average protein and a small spring wheat crop whose protein will be much in demand.
Analysts agreed the rally in U.S. wheat futures that saw prices surge from mid-May until the break in early July probably had been overdone, resting on efforts to build a weather premium into the market in the event of a disastrous spring wheat harvest. The market turned lower when traders considered that the one serious weather problem in the world was centered in the northern Plains. Meanwhile, global supplies were large, no other major growing regions faced weather problems as dire as those seen in the Dakotas and Montana, and the U.S. winter wheat harvest came in about as expected. So wheat futures since early July tumbled as much of the weather premium was pulled out of the market.
“It’s rare that spring wheat dies without anything else dying,” said Matt Beeson, president, Beeson Associates, Crestwood, Kentucky, U.S. “But the winter wheat crop, other than the quality, was okay, so spring wheat, which was dying in June, captured the market’s attention. Then the market came to the realization we still have a lot of winter wheat and that we’ll have another corn crop that may be average or a bit below with regard to yield, but certainly not a disaster. Spring wheat alone could not pull world grain higher, and so the market finally broke back.”
Steve Freed, vice-president, ADM Investor Services, Chicago, Illinois, U.S., added U.S. farmers in the past month were heavy sellers not only through the wheat they were harvesting but also through forward selling some of the wheat they planned to harvest in 2018.
“There is a growing consensus that next year could see an increase in wheat acres, which may have encouraged some of the forward sales,” Freed said. Such forward selling may be unusual for the date, but in areas where growers don’t see a lot of precipitation and given the drop in corn prices, “wheat may be back in the mix.”
Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, commented while the U.S. and Canadian spring wheat crops will be a lot smaller than initial expectations, they will not be as small as some private forecasts suggested.
Another reason for the futures drop was the effect the June rally had on U.S. export prices, Meyers said. U.S. export wheat prices in many markets weren’t competitive even before the rally. The rally significantly widened the spread between U.S. wheat offers and those made by other wheat exporters, and it was clear U.S. wheat exports would tail off if the spread wasn’t narrowed.
Meyers pointed to a related factor.
“Some countries are expected to have better crops than initially forecast, namely Russia and France,” he said. “Russia is always one of the low-cost sellers, so if they have a large crop, they tend to move it into the world market quickly and at aggressive prices.”
US winter wheat harvest
Prices have more or less aligned with where world and U.S. wheat supply and demand is, Meyers said. Current levels in Kansas City, Chicago and spring wheat futures are probably what one would expect given a carryover that is going to decline in the United States but with world wheat stocks remaining large, he said.
Meyers said there was a possibility the corn crop could turn out to be a little larger than expected given recent and forecast favorable weather across most key regions. December corn futures could drop to $3.50 to $3.55 a bushel (from around $3.71 on Aug. 10), and November soybeans could get down to $email@example.com a bushel (around $9.40 on Aug. 10), he said.
“We could see a little pressure on wheat futures,” Meyers noted. “But I don’t see a sustained significant drop in wheat prices because of pressure from corn and soybeans, pressure that would be offset by the U.S. carryover of wheat turning out to be less than initially projected.”
Freed said with Chicago December wheat at current levels, many traders were not willing to go short. He said some fund managers thought the U.S. might gain a little more export demand because of some issues in Europe, such as low quality in Germany and Poland. The Canada crop was struggling, and Western Australia was dry.
“So there are some people who have suggested U.S. wheat exports in 2017-18 may be closer to 1.025 billion bushels than the 975 million bushels forecast by the USDA in July,” Freed said. “I think the funds may be saying if there is a little more weakness in the nearby, they might step up to the plate and start nibbling at wheat from a supply standpoint.”