Grain market roundtable

by Jay Sjerven
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Ideas that after wheat futures had set season lows, in effect, multi-year lows, prices were poised to turn higher were quashed by unexpectedly bearish August Crop Production and World Agricultural Supply and Demand Estimates reports issued Aug. 12 by the U.S. Department of Agriculture. Corn and soybean futures prices plunged on production and yield forecasts well above trade expectations. Swooning corn and soybean futures pulled wheat prices sharply lower, to a fresh round of new contract lows in Minneapolis and Kansas City wheat futures. Chicago wheat futures traded within a hair’s breadth of lows set in early May. And more weakness probably was in store, based on comments from analysts interviewed by World Grain’s sister publication, Milling & Baking News.

“It was another shocker USDA report,” said Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., Naperville, Illinois, U.S.

“It’s hard for me to remember any USDA report where the trade was so far wrong,” said Steve Freed, vice-president, ADM Investor Services, Chicago. “A report that was expected to be friendly futures turned out to be one of the most bearish we’ve had in a long time.”

Meyers and Freed referred primarily to the initial survey-based corn and soybean forecasts for 2015.

“But with corn futures prices dropping 20¢ a bushel and soybean futures prices dropping 60¢ after the reports, there was no way wheat would have been able to hold its ground,” Meyers commented.

The U.S. and world wheat supply-and-demand forecasts in themselves were neutral to bearish, Freed and Meyers agreed.

The USDA lowered its forecast for all-wheat production this year by 12 million bushels, to 2.136 billion bushels, on lower estimates of hard red winter, soft red winter and white wheat production. The USDA raised its forecast for hard red spring wheat production from the July outlook, but only by 3 million bushels, to 576 million bushels. Pre-report trade estimates suggested an all-wheat crop of about 2.161 billion bushels.

The USDA trimmed its forecast for 2015-16 U.S. wheat exports to 925 million bushels from 950 million bushels as of the July projection because of the slow pace of exports thus far this crop year. Last year, the United States exported 854 million bushels of wheat, but in 2013-14 the United States exported 1.154 billion bushels. Domestic use of wheat in 2015-16 was forecast at 1.239 billion bushels, unchanged from the July outlook but up 7% from 1.154 billion bushels in 2014-15.

The USDA forecast the carryover of wheat on June 1, 2016 at 850 million bushels, up 8 million bushels from the July projection and up 97 million bushels, or 13%, from 753 million bushels in 2015. If the forecast is realized, the 2016 wheat carryover would be the largest since 863 million bushels in 2011.

Record world wheat forecast

The USDA forecast 2015-16 world wheat production at a record 726.55 million tonnes, up 4.59 million tonnes from the July projection and up 1.3 million tonnes from 725.25 million tonnes in 2014-15, the current record. The USDA forecast world wheat exports in 2015-16 at 156.21 million tonnes compared with 158.07 million tonnes as the July projection and 165.05 million tonnes in 2014-15. World wheat consumption in 2015-16 was forecast at a record 714.74 million tonnes, up 5.8 million tonnes from 708.94 million tonnes in 2014-15, the current record.

“In my mind, the most bearish aspect of the wheat numbers was the higher production forecasts for Russia (up 3 million tonnes from July to 60 million tonnes) and Ukraine (up 1.5 million tonnes to 25.5 million),” Meyers said. “They are the low-price export sellers, and their crops are getting larger.”

Those nations in recent years have been principal suppliers of wheat to Egypt, the world’s largest wheat importer and once a major customer of the United States.

Meyers said he expected wheat futures prices to continue to decline in coming weeks for three reasons.

“First, I think corn and soybean futures prices will continue to go lower,” Meyers said. “Second, wheat export prospects are not likely to improve anytime soon, at least until competitors have sold more of their crops. And third, the outlook for the planting of the 2016 winter wheat crop is favorable.”

Meyers pointed to improved soil moisture profiles in the southwestern U.S. for planting the next hard winter wheat crop, and conditions for planting the 2016 soft red winter wheat crop were good as well.

Freed said China’s unexpected devaluation of its currency also may weigh on wheat and other commodity prices for quite some time.

“The devaluation knocked a lot of commodities down,” Freed said. The devaluation will make it more expensive for China to import commodities, including U.S. wheat and soybeans, this at a time when the USDA has been upwardly revising its estimates of Chinese wheat stocks, which will limit its needs for wheat imports at any rate.

Meyer’s outlook for wheat prices was bearish, suggesting December wheat futures may set lows at $4.65-$4.75 a bushel in Kansas City and Chicago futures and $4.85-$4.95 in Minneapolis sometime between now and November.

He noted the August USDA wheat production numbers won’t be adjusted again until the Small Grains Summary is published at the end of September. He said he and many other analysts believed the August report may have overstated corn and soybean production potential, based on Aug. 1 conditions. Weather since has been very dry in key areas, and he expected yields may fall short of current forecasts. Should that prove to be the case, prices may get a boost but perhaps not until November.

Also a possible supportive feature would be deteriorating wheat production prospects in Australia because of the strengthening El Niño. Should Australia’s exportable supply be reduced from current projections, the United States may benefit by picking up some export demand. But that was down the road.

Impact on bakers

Meyers said with flour prices the lowest in years, bakers should continue to extend coverage as wheat futures prices move lower. Bakers should look to wrap up October-December coverage and extend contract balances into January-March, and if prices drop another 15¢ to 20¢ a bushel (from Aug. 12 levels), first-quarter 2016 coverage should be taken more vigorously. Should prices approach his forecast lows, Meyers suggested bakers begin covering April-June.

While wheat futures prices remained attractive and flour prices low, millers and bakers grappled with wheat quality considerations. Soft red winter wheat quality was particularly worrisome.

U.S. Wheat Associates in its Aug. 7 harvest report indicated, based on 519 samples, the nation’s soft red winter wheat crop earned an average grade of No. 3 compared with No. 2 last year. Falling number averaged a disappointing 267 seconds compared with 315 seconds in 2014. U.S. Wheat Associates noted the falling number score for this year’s crop was the lowest since the organization began surveying the quality of the soft red winter wheat crop in 1998. The previous record-low falling number was 294 seconds in 2013. The average test weight of this year’s soft red winter wheat crop was 57.2 lbs per bushel compared with 58.1 lbs for the 2014 crop.

The soft red winter wheat crop, especially Missouri and Illinois but also other key areas in the central states, exhibited damage from an excessively wet growing and harvest seasons. For some producers, this was the third consecutive year of harvesting a crop with disappointing quality because of the vagaries of weather.

One soft wheat miller said securing milling quality supply has been a struggle.

“We’re trying to wrench old crop supply from tight producer and elevators hands, wherever that supply may be,” the miller said.

Mills in the worst affected areas have reached out to adjacent and even distant territories to purchase wheat with the quality they require. Kentucky had a good crop, and demand for that state’s wheat has been almost frenetic, raising the cash basis levels. The quality deficiencies in some key producing states translated into a strong cash market for milling quality soft red winter wheat supply nationwide.

The miller noted the cash soft red winter wheat basis may remain firm or even go higher.

“The supply situation isn’t going to get any better,” he noted.

Nearby Chicago wheat futures were trading at a premium to Kansas City futures. One analyst suggested Chicago futures may continue to lead Kansas City futures at least in the short term as millers and bakers weigh the need to draw hard wheat into the soft winter wheat cash market. Blending low-protein hard wheat and soft wheat in a flour may be a workable option for certain products typically manufactured from soft wheat flour.

The transition to milling 2015 crop hard red winter wheat has experienced a few hiccups, but millers and bakers are making the necessary adjustments. The crop was “weaker” than a year ago as reflected in U.S. Wheat Associates data. Based on 368 of 530 intended samples, U.S. Wheat Associates said the average grade of the 2015 crop was No. 2 hard red winter wheat compared with No. 1 last year. Test weight was averaging 58.9 lbs per bushel versus 60.7 lbs in 2014. The lower test weight was the principal reason this year’s crop was graded No. 2. The protein average thus far was 12.3%, down a full percentage point from 13.3% as the 2014 crop’s average.

This year’s hard red winter wheat crop was sufficiently different from that harvested in 2014 to give rise to a sometimes bumpy transition to using the new crop supply for certain applications, but that transition was well under way and rough edges were being smoothed.

The hard red spring wheat harvest was proceeding at a rapid clip, but it was too early to assess its milling and baking characteristics. The condition of the North Dakota crop in the field was outstanding, and there were expectations the crop will be large and its quality good.

Jay Sjerven is senior editor, markets, for Milling & Baking News, sister publication of World Grain. He can be reached at jsjerven@sosland.com.
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