ARLINGTON, VIRGINIA, U.S. — In its November World Agricultural Supply and Demand Estimates (WASDE) report, the U.S. Department of Agriculture (USDA) lowered its forecast for final 2015-16 U.S. wheat exports by 1.36 million tonnes compared to its October forecast. Citing a “very slow sales pace” and poor price competitiveness, USDA now predicts 2015-16 (June to May) U.S. wheat exports will be about 21.8 million tonnes, which would be the lowest export volume since 1971-72.
This generality does not paint a complete picture of prices and demand for three important U.S. wheat classes: hard red winter (HRW), hard red spring (HRS) and soft red winter (SRW). There are unique fundamentals affecting each class that provide important perspective on the situation.
USDA expects HRW exports to be 20% less in 2015-16 than last year. Increased competition from abundant supplies of lower cost wheat in competitor countries is reflected in HRW sales-to-date of 3.82 million tonnes, running 25% behind 2014-15 sales. However, the U.S. Wheat Associates (USW) commercial sales report shows that HRW sales-to-date to Brazil are more than 1 million tonnes less than last year at this time because Argentina returned as Brazil’s primary hard wheat supplier. Subtract Brazil from the comparison and HRW exports are just 5% behind last year’s pace.
While price sensitive customers such as Egypt have been able to rely on lower cost Black Sea wheat thus far this year, other customers who value quality are taking advantage of a buying opportunity with HRW at bargain prices. Prices for HRW 11.5% protein from the Gulf fell to $208 FOB (free on board) in the Nov. 13 USW Price Report, $71/tonnes lower than one year prior. In addition, ocean freight rates are down an average of 17% from this time last year. Partly as a result, year-to-date HRW sales to South Asia are five times larger at 157,000 tonnes, and HRW sales to the E.U. are triple those of last year at this time at 83,000 tonnes. Colombia and Taiwan HRW purchases are respectively 31% and 41% ahead of HRW sales on this date a year ago.
Unlike the situation with HRW, tighter supplies of SRW milling quality wheat are influencing prices. USDA estimates SRW production declined 21% to 9.77 million tonnes in 2015-16 after an 18% decline in planted acres. As a result, total SRW supply fell to 14.5 million tonnes compared to the 5-year average of 15.8 million tonnes, its lowest since 2010-11. However, the supply of milling quality SRW is even smaller because disease and unfavorable weather damaged quality in a significant portion of the 2015-16 crop. This constrained supply of quality soft wheat has pushed prices higher for SRW and soft white (SW), the only high quality substitute, and SRW sales to date of 2.37 million tonnes are 19% behind last year’s pace.
USDA did not make any changes to the SW export estimate, but premiums for lower protein specifications have grown steadily since June. Severe drought throughout the SW growing region reduced production to an estimated 3.81 million tonnes, 18% below the 5-year average, and limited the supply of low protein SW. Year-to-date exports of SW are 2.57 million tonnes, 6% behind last year’s sales-to-date. Increased sales in three of the top five markets from 2014-15 have helped offset lower sales in Japan, the number one white wheat customer and Korea, the number three customer.
The smaller supplies of soft wheat, both SRW and SW, continue to support Chicago Board of Trade (CBOT) wheat futures. The larger U.S. production of HRW and increased competition from abundant world supplies has pressured Kansas City Board of Trade (KCBT) wheat futures, so the CBOT-KCBT premium that we first reported in the Aug. 13 edition of “Wheat Letter” has widened to 15¢. KCBT wheat futures have historically traded at an average 35¢ premium to CBOT wheat futures, but that premium dropped and finally disappeared last June.
The Minneapolis Grain Exchange (MGEX) HRS wheat futures premium over CBOT has also narrowed this marketing year. For the past 15 years, MGEX wheat futures have averaged a 96¢ premium over CBOT futures. However, in marketing year 2015-16, that spread is just 21¢ due to bullish SRW fundamentals and bearish underlying fundamentals in the HRS market. USDA estimates U.S. farmers produced 15.3 million tonnes of HRS in 2015-16, the largest crop since 2010-11 and one of exceptional quality. Increased production in turn pushed the forecasted HRS supply to 22.3 million tonnes, 12% greater than the 5-year average.
With HRS wheat futures $33/tonnes lower than one year ago, farmer selling has slowed to a trickle as they wait for improved prices, which has caused basis levels to firm. HRS year-to-date sales total 4.46 million tonnes, down 11% from this time last year, in spite of relatively lower HRS prices. USDA, despite decreasing the HRS export estimate by 544,000 tonnes from the October estimate, still expects HRS exports to reach 7.48 million tonnes, which would be the highest level in 5 years.
Perhaps the most significant factor for all U.S. wheat exports is the value of the U.S. dollar. Year-over-year, the U.S. Dollar Index, a measure of the value of the U.S. dollar relative to a basket of U.S. trade partners' currencies, has increased 12 percentage points, indicative of the U.S. dollar remaining strong relative to other currencies. For comparison, over the past 20 years, the U.S. Dollar Index has averaged only a 7-percentage-point change per year and the last time it was over 99.00 was in 2003. Consequently, it costs importers more to buy U.S. wheat today and effectively reduces the price of competing wheat supplies.
While these factors continue to be a challenge for U.S. wheat buyers and sellers alike, the U.S. wheat store is always open and USW will continue its long-term effort to serve its customers and demonstrate the value of all six U.S. wheat classes.