WHEN IT COMES TO MARKETING, NOT ALL WHEAT IS EQUAL
BY JON DRIEDGER
Wheat prices have experienced quite a ride between spring and fall. There was a sharp rally in late June and early July as markets focused on the dry conditions in the northern plains of the U.S. and the southern prairies. Some concerns over the European crop, dryness in Australia and potential imperfections in other regions added further support, together with some strength in corn and soybean markets.
However, prices gave up all of their gains and then some over the next six weeks. While the North American spring wheat crop was pointing toward a tightness of supplies, the uncertainty of the production outcome eased as harvest got underway, and the U.S. Department of Agriculture posted larger estimates than the trade was looking for. In the meantime, conditions improved in other regions, including bin-busting expectations for Russia. The end result is a global crop that may only fall slightly behind last year’s record volume, while the projected ending stocks look to post an all-time high at the end of the crop year. In other words, the alarm that was raised in mid-summer succumbed to the reality that the world will be awash in wheat once again. The result is Chicago and Kansas City futures prices trading back down to 10-year lows.
With the ebb and flow of the market and the stream of information regarding crop conditions, we are reminded again that when it comes to marketing wheat, not all wheat is the same. The huge global stockpile of wheat means that a sharp and sustained increase in the wider wheat complex seems unlikely in the foreseeable future. However, supplies of high-quality, high-protein wheat are short, and demand for this type of wheat is quite inelastic. This means that there is the potential for prices to be supported within a heavier price environment for wheat as a whole. This is why the Minneapolis Hard Red Spring Wheat futures prices continue to hold a sizable premium compared to the other markets, even if they, too, have pulled well back from their early summer peak.
Farmers need to keep these dynamics in mind when making selling decisions on this year’s harvest. Representative and accurate samples are absolutely critical. Shop those samples around widely, including to buyers whom you might not have traditionally sold to in the past. The shortage of high-quality wheat means that good selling opportunities will arise during the year if the protein and grade are there. However, these premiums may only be available from specific buyers, and will likely hinge on the sample meeting specific requirements. Markets often work through supply shortages through basis premiums and cash market specials, rather than a widespread structural strength in values. The opportunities may also be somewhat fleeting, so having the samples in ahead of time will be important.
The effects on prices for the 2018/19 marketing year need to be kept in mind as well. In particular, one has to be careful not to make seeding decisions based on marketing last year’s crop. In other words, the fundamentals for the upcoming crop year will look different than what is driving prices today. While there is a shortage of high-quality spring wheat today, that may not be the case next year if seeded area increases on the northern plains and Canadian Prairies at the same time that yields improve and quality remains high. Demand for high-quality wheat is quite inelastic, but it’s also a very small segment of wider global wheat consumption. As a result, we are one good harvest away from satisfying that demand and forcing premiums lower. That’s not to suggest that farmers should shy away from planting spring wheat. Rather, it’s important to make sure that decisions are based on a realistic outlook, rather than driving while looking in the rear-view mirror.
The wheat market is incredibly dynamic. It can also be frustrating for farmers trying to make marketing decisions. While you can’t control what the wider market does, you can help yourself by ensuring that you have accurate samples in the hands of a wide range of buyers and by keeping a close eye on local premium selling opportunities.
Jon Driedger is a senior market analyst with FarmLink Marketing Solutions.