Spring wheat supplies dwindling

by Meyer Sosland
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Hard red spring wheat futures prices and cash wheat premiums at the Minneapolis Grain Exchange (MGEX) have skyrocketed in recent weeks on mounting concerns that supply, at least of quality wheat of that class, will be depleted before the 2008 crop begins to flow into marketing channels. The March future in Minneapolis surged above $16 a bushel in mid-February, and the May future soared above $14, levels never before seen in wheat.

On Feb. 9, MGEX, Kansas City Board of Trade and Chicago Board of Trade announced they would expand daily trading limits effective Feb. 12 to 60¢ from the current 30¢ to accommodate the phenomenal volatility.

Record-high old-crop spring wheat futures prices thus far have failed to ration demand so stocks can be stretched into the new marketing year. New crop wheat futures prices set record highs on Jan. 29 and seemed poised to break through those levels. But it was uncertain whether new crop prices were high enough to encourage producers in the United States (U.S.) to seed more spring wheat this year than in 2007.

The U.S. Department of Agriculture (USDA) on Feb. 8 forecast the carryover of hard red spring wheat on June 1, 2008, at 73 million bushels, down 44 million bushels from the 2007 carryover of 117 million bushels. It would be the tightest carryover of spring wheat in more than 60 years.

Additionally, a wheat carryover date of June 1 doesn’t reflect the reality of the spring wheat market as the harvest in the northern Plains only gets under way in July and new crop spring wheat typically doesn’t begin to flow into marketing channels until the last week of July or the first couple of weeks in August.

Compounding matters for wheat buyers have been cash wheat premiums well above historical averages. The Minneapolis basis on 14% spring wheat was $4.25 over the Minneapolis May contract, a record premium leaving the cash price for the benchmark for spring wheat at an eye-popping $18.20 per bushel. The cash wheat premium for 15% spring wheat was $5 over. By themselves, these premiums were significantly higher than typical cash wheat prices in recent years. For instance, the national average farm price for wheat in 2005-06 was $3.42 per bushel.

Skyrocketing cash prices for spring wheat have not yet put the brakes to foreign demand for U.S. spring wheat. The USDA projected 2007-08 exports of hard red spring wheat at 275 million bushels, up 25 million bushels from the previous year. But as of Jan. 31, exports and undelivered sales of hard red spring wheat for the current marketing year were 293 million bushels, 18 million bushels higher than the USDA forecast, with four months remaining in the marketing year.

One U.S. miller expressed hope that some foreign spring wheat buyers would sell back spring wheat cargoes and substitute lower-priced hard winter wheat cargoes. But some exporters were doubtful.

For decades, a major outlet for U.S. spring wheat has been Pacific Rim nations. Anyone expecting demand from those customers to diminish in response to higher prices likely will be disappointed, said Thomas J. Hammond, president, Columbia Grain International, Inc., Portland, Oregon, U.S.

"We can’t ration demand," Hammond said. "Our customers have some pretty inflexible requirements. If there is any price rationing, it is going to take place in the U.S. first."

Hammond said he has been asked why private Philippine wheat buyers won’t sell back their spring wheat purchases and use hard winter wheat instead.

"For one thing, the end users there like spring wheat," he said. "That’s what they want. Even if end users were willing to switch wheat class in exchange for a lower price, it would be very difficult for Philippine flour millers to unwind what they’ve already programmed. They purchase combination cargoes with white wheat, hard winter and spring wheat in different holds. To unwind something like that is easier said than done."

Recognizing tightness in U.S. spring wheat supplies, buyers such as the Philippine flour millers have accelerated their buying programs for the current marketing year, Hammond said. Still, none of the major importing nations of Asia — the Philippines, South Korea, Japan and Taiwan — has yet covered requirements for the summer, when U.S. spring wheat supplies were expected to be desperately tight.

While Asian wheat buyers have been inflexible with regard to buying spring wheat, there has been some easing in rigidity with regard to specifications, Hammond said. Certain buyers that traditionally tender for 14.5%-protein hard red spring wheat were considering lowering protein specifications to 14%. Other quality compromises may be required in the months ahead he said.

Hammond said tightness in U.S. wheat supplies was becoming a greater concern abroad.

"I have three guys from a Japanese television crew standing next to my desk right now, and it’s what they want to talk to me about," he said. "I don’t know what happens next. We’re in uncharted territory."

One of the leading Japanese flour millers said in February that, despite the soaring prices, the the Ministry of Agriculture, Forestry and Fisheries, which controls Japan’s wheat imports, appeared to be willing to purchase enough high-protein spring wheat from the U.S. and Canada to adequately supply Japan’s mills.

Unprecedented prices also have not adequately rationed U.S. demand for spring wheat, even with widespread substitution of high-protein hard red winter wheat for spring wheat by mills across the nation.

High-protein hard winter wheat was trading at rapidly widening discounts to spring wheat of the same protein. Bakers and millers were working together to change formulations of products to accommodate a higher percentage of hard winter wheat compared with spring wheat in blends, and some formulas calling for blends were being shifted to hard winter wheat only. One miller described the shift to hard winter wheat from spring wheat as a "mad rush."

At the same time, some baked products — hearth bread, hard rolls, bagels and other specialty items — require flour milled from high-protein, high-gluten spring wheat. Bakers of these products had little or no flexibility with regard to substituting hard winter wheat for spring wheat. Their pressing needs were reflected in the recent widening in the spread between cash premiums on 14% protein spring wheat and 15% protein spring wheat

Supply of high-protein hard red spring wheat was diminishing rapidly. U.S. hard red spring wheat production in 2007 totaled 449 million bushels, up 4% from 432 million bushels in 2007. Both the 2007 and 2006 crops had outstanding quality and were graded No. 1 dark northern spring. But only 43% of the 2007 crop had protein of 15% or more, whereas 48% of the 2006 crop had 15% protein or more. Stated in bushels, about 193 million bushels of the 2007 crop had protein of 15% or more, while 207 million bushels of the smaller 2006 crop had protein of 15% or more.

Most spring wheat already was in commercial hands. A Minneapolis grain merchant said a survey of northern Plains elevators indicated between 85% and 95% of the 2007 spring wheat crop in their territories already was sold by producers. The little wheat still owned by producers might not move until the new crop is planted and farmers have some confidence in 2008 production prospects, the merchant said. So there was no expectation farmer selling would bring noticeable pressure on the futures or cash markets in the near term.

Erica Peterson, marketing specialist for the North Dakota Wheat Commission, said she doubted spring supplies would be depleted before the new crop, but that applied to undifferentiated spring wheat. Spring wheat supply with particular qualities and characteristics could indeed run out.

Those looking to Canada for rescue were confounded by a Statistics Canada estimate of Dec. 31 Canadian wheat stocks that fell well below expectations. Statistics Canada on Feb. 5 estimated Canada’s stocks of wheat, excluding durum, at the end of 2007 to be 12,278,000 tonnes, down 5,223,000 tonnes, or 30%, from 17,501,000 tonnes a year earlier.

The USDA on Jan. 12 projected U.S. imports of Canadian spring wheat in 2007-08 at about 37 million bushels, down from 50 million bushels in 2006-07.

As if spring wheat users didn’t have enough to worry about, a new source of domestic demand has emerged: pasta manufacturers. Pasta makers not specifying that their products be made of 100% durum semolina always were free to request a blend of durum and spring wheat. But with durum selling at an astounding $24 a bushel, spring wheat, even at record prices, seemed alluring. The result has been an increase in blending spring wheat with durum for a number of pasta products, with individual products shifting to spring wheat only.

With old crop spring wheat supplies so tight and wheat prices so high, it would be normal for the market to anticipate an expansion in plantings for the new crop spring wheat harvest. But no such expansion seemed certain this year. All hinged on price movements of new crop spring wheat relative to those of several alternative crops, including corn and soybeans, durum and sunflower.

The Minneapolis grain merchant said he was on the fence with regard to projecting spring wheat plantings. He pointed to private estimates calling for a smaller area planted to spring wheat this year. In addition to comparing input costs and prospective revenue per acre likely to be afforded by the competing crops, producers also had lingering concerns over variability in yield and quality seen in spring wheat in many years.

"We need unchanged to more acres and better yields to even hope we’ll be able to begin rebuilding stocks in 2008-09," he said. "The USDA will issue its Prospective Plantings report on March 31. But the report will be based on a survey conducted during the first two weeks in March, and minds can change in the northern Plains before farmers take to fields, which should keep the market on edge until more solid harvested spring wheat acreage projections become available."

In January, the IGC issued a global wheat production report which said, "Competition from other crops may prevent spring wheat sowings from increasing much in the U.S., but a significant increase is likely in Canada."

The latest IGC projections show 5.3 million hectares of non-durum spring wheat being planted in the U.S. this year, compared to 5.4 million in 2007. The IGC’s forecast for 2008 Canadian non-durum spring wheat plantings is 6.8 million hectares, compared to 6.6 million in 2007. WG

Jay Sjerven is senior editor, markets for World Grain’s sister publications, Milling & Baking News and Food Business News. He can be reached at jsjerven@sosland.com.