This report provides an analysis of U.S. and World wheat supply-demand factors and 2018-2019 marketing year price prospects following the USDA’s August 10 Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports. It also incorporates alternative U.S. wheat market supply-demand and price projections for the “next crop” 2018/19 marketing year from Kansas State University – weighing the likelihood of greater or lesser amounts of U.S. wheat exports with the associated U.S. wheat price ramifications. This article will be available in full on the KSU AgManager website in coming days (http://www.agmanager.info/).
Following is a summary – with the full analysis-article for Wheat Market Outlook in Late August 2018 to be found at this web location:
Wheat Market Outlook in Late August 2018
Daniel O’Brien – Extension Agricultural Economist, K-State Research and Extension
August 30, 2018
A. Wheat Futures & Cash Market Trends Following the August 10th USDA Reports
Since the USDA’s August 10th Crop Production and World Agricultural Supply and Demand Estimates (WASDE) report, CME SEPTEMBER 2018 Kansas Hard Red Winter (HRW) Wheat futures have traded mostly lower. These reports were released during when hard red winter wheat harvest was complete in Kansas, Oklahoma and Texas, and nearly complete in Nebraska and Colorado. Soft red winter wheat harvest was also all but complete in the central and eastern Corn Belt, while spring wheat harvest had not yet started in the northern states. White wheat harvest in the Pacific Northwest was 44%-78% complete across states involved.
On the day of the reports (August 10, 2018), SEPT 2018 Kansas HRW wheat futures opened at $5.78 /bu, and traded in the range of $5.59-$5.85 ½ before closing $0.18 ¾ lower to $5.59 ¾. Since then, SEPT 2018 HRW wheat futures have trended lower, trading as high as $5.68 ¾ on August 17th and as low as $4.97 ¾ on August 29th before closing at $5.12 ¼ /bu on Thursday, August 30th (Figure 1).
On August 30th – the 14th trading day after the USDA reports – Kansas cash wheat price terminal quotes for ordinary U.S. no. 1 HRW in central Kansas ranged from $4.92 ¼ to $5.19 ¼ per bushel – with basis ranging from $0.20 under to $0.07 over SEPT 2018 futures. Cash wheat prices in eastern Kansas grain terminals ranged from $4.82 ¼ to $4.97 ¼ with basis ranging from $0.30 under to $0.15 under SEPT 2018 futures. These prices are up 35%-44% from the range of $3.42 ¼ to $3.83 ¼ /bu in late December 2017 in eastern and central Kansas – with basis at that time ranging from $0.80 under to $0.39 under nearby MARCH 2018 futures. A Hard White Wheat (HWW) grain terminal bid was available in Wichita, Kansas on 8/29/2018 for $5.07 ¼ /bu, with a basis of $0.05 /bu under SEPT 2018 Kansas HRW wheat futures.
In western Kansas on August 30th bids for ordinary U.S. no. 1 HRW wheat at selected grain elevators ranged from $4.72 to $4.96 /bu, with basis being $0.40 under to $0.16 under SEPT 2018 futures. Recent wheat cash price bids are up approximately 36% from $3.47 to $3.64 /bu in late December 2017 in western Kansas – when local basis varied from $0.85 under to $0.58 under MARCH 2018 futures.
Key market factors that had positively influenced the hard red winter wheat market over the last few weeks include the following. These are: 1) lower 2018 U.S. hard red winter wheat production; 2) higher protein levels in drought-damaged parts of the central and southern plains states of Texas, Oklahoma and Kansas; and 3) foreign wheat crop concerns in competitive export countries. Major wheat producing countries and/or regions of the World in which there are currently concerns about either the quality or quantity of 2018 wheat production include the European Union, parts of the Black Sea Region, and parts of Australia. However, when the promise of higher U.S. wheat exports did not materialize – at least not yet – prices fell back. Local wheat basis levels that were “wide & weak” in December 2017 have strengthened by $0.46-$0.60 /bu in central Kansas, and by $0.42-$0.45 /bu in western Kansas as of August 30, 2018.
B. 2018 U.S. HRW Wheat Protein & Quality Results
Harvest results for 2018 have shown lower yields but higher protein in Oklahoma and Kansas. The August 24th Harvest Report of the U.S. Wheat Associates (http://www.uswheat.org/harvest) stated:
“U.S. farmers are almost done with a notable hard red winter (HRW) harvest. The run of excellent test weights and protein levels has held up through the entire harvest with less than 10% of the HRW in Montana and the Pacific Northwest remaining. Non-grade data changed very little with analysis from 19 new samples reported this week. Moisture dropped 0.2% from 11.3% to 11.1%, protein (12% moisture basis) remained at 12.5% overall while test weight increased to 60.8 lb/bu (79.9 kg/hl) up from 60.7 lb/bu (79.8 kg/hl) and the crop is sound. Grade factors improved a bit and the crop remained No. 1 U.S. HRW. Averages for mill, dough and bake results remain very good and USW will share that data after weighted averages are determined.”
U.S. Wheat Associates indicated that according to 428 samples analyzed through August 24, 2018, that average protein for the 2018 U.S. hard red winter wheat (HRW) crop averaged 12.5%, with average test weight of 60.8 lb/bu, 11.1% moisture, dockage of 0.5%. a falling number rating of 372 seconds, and 1.3% defects. This compares to the results of 488 samples for the 2017 U.S. HRW Wheat crop, which according to U.S. Wheat Associates test data averaged 10.6% protein, 60.8 lbs/bu test weight, 10.6% moisture, 0.6% dockage, 367 seconds for the Falling Number test, and 1.1% defects.
Consequently, lower yields occurring during the 2018 HRW harvest in Kansas and Oklahoma (i.e., 38.0 bu/ac in 2018 in Kansas vs 48.0 bu/ac a year earlier, and 25.0 bu/ac in Oklahoma in 2018 vs 34.0 bu/ac a year ago) have been partially offset income-wise by higher protein levels – leading to higher cash market prices.
C. World Wheat Supply-Demand – “Large supplies but tightening stocks”
For the “new crop” 2018/19 marketing year (MY) which began on June 1, 2018, the USDA projected the following (Figures 13 thru 17):
World wheat total supplies in “new crop” MY 2018/19 would be a near record 1,002.70 million metric tons (mmt) accompanied by record high total use of 743.74 mmt – down 1.2% and up 0.2%, respectively, from “old crop” MY 2017/18. The USDA in essence projects that the recent “large supply – large use” situation that has persisted for the global wheat market since the last “supply-demand” period in MY 2012/13 will continue (Figure 13). However, there have been concerns about 2018-2019 wheat crop production amount and quality prospects and resulting export supply potential from parts of the European Union (Germany and France), the Black Sea Region (Russia & Ukraine), and Australia (New South Wales).
CommentaryKSU: These aggregate World supply and use numbers do NOT bring light to the shortage of high protein wheat that is problematic in World markets, OR the sizable wheat stocks held by China that are isolated from the World wheat market. There are concerns from the Black Sea Region about the amount of food versus feed quality wheat available for export on World markets this year.
World wheat exports are forecast to also be a new record high of 183.87 mmt in the “new crop” 2018/19 marketing year – up from a 182.64 mmt in “old crop” MY 2017/18, the previous record high of 183.27 mmt in MY 2016/17, and from 172.8 mmt in MY 2015/16 (Figure 13). While World wheat exports are forecast to increase by 10.8% since MY 2013/14 (i.e., 1 year after the short crop year of MY 2012/13), over the same period U.S. wheat exports are projected to decline by 12.8% from 1.176 billion bushels in MY 2013/14 to 1.025 bb in “new crop” MY 2018/19.
CommentaryKSU: Concerns about adequacy of exportable supplies in other major wheat exporting countries – aside from the U.S. – has raised the possibility of at least moderately stronger U.S. wheat exports occurring in “new crop” MY 2018/19. This discussion reinforces the idea that the U.S. is currently positioned as an “emergency supplier of last resort” to many global wheat importers.
World wheat ending stocks are projected to be 258.96 mmt in “new crop” MY 2018/19 – the 2nd highest in history following the record high of 273.07 mmt in “old crop” MY 2017/18 (Figure 13). Since MY 2007/08 World wheat ending stocks have been growing an average of 13.5 mmt per marketing year from the low of 177.90 mmt in MY 2012/13 – out-pacing the annual growth in total use of 11.8 mmt per marketing year.
World wheat percent ending stocks-to-use (% S/U) are forecast to be 34.8% in “new crop” MY 2018/19 – the 2nd highest on record (Figures 16a-b). The record high is 36.8% in “old crop” MY 2017/18. World wheat % stocks-to-use has consistently increased each year since MY 2012/13 until the current year. Since 25.9% stocks/use in ‘short crop’ MY 2012/13, World wheat percent ending stocks-to-use (% S/U) increased to 28.3% in MY 2013/14; 31.35% in MY 2014/15; 34.5% in MY 2015/16, 34.8% in MY 2016/17; and to the record high of 36.8% S/U in “old crop” MY 2017/18; before a projected moderate decline to 34.8% in “new crop” MY 2018/19.
E. “World-Less-China” Wheat Supply-Demand – ““Tightening to an 11-Year Low”
The broader “large crop-over supply-low price” situation in the World wheat market may be continuing to “obscure” or “masking” the effect of large but somewhat isolated Chinese wheat stocks on actually available World wheat supplies and stocks.
From a “World-Less-China” perspective, forecast ending stocks-to-use of 19.8% would be the lowest level in 11 years – since 17.5% S/U in MY 2007/08 (Figures 17a-b). “World-Less-China” wheat ending stocks-to-use is forecast to be down sharply from 23.4% in “old crop” MY 2017/18, and from the range of 22.05% to 27.5% during the MY 2008/09 – MY 2017/18 period.
IF this “China supply isolation factor” eventually leads to noticeably tighter available global supplies of purchasable wheat for buyers to gain access to in coming months, it could have a significant positive impact on U.S. and World wheat market prices in “new crop” MY 2018/19. However, unless there is this change in the broader, overriding focus of the World wheat market AWAY FROM large aggregate global supplies over TO available “World-Less-China” supplies, the attention of the World wheat market and market prices may not change in a positive direction. The information in the following section may be an impetus for that change.
F. “Major Wheat Exporters” % Stocks/Use – “Also Tightening to an 11-Year Low”
Ending stocks among global wheat exporters including Argentina, Australia, Canada, the European Union, Russia, Ukraine, and the United States are projected to decline to 49.9 mmt in “new crop” MY 2018/19. This amount would be down from 66.25 mmt in “old crop” MY 2017/18, and from the recent high of 68.3 mmt in MY 2016/17. Excluding the United States with its current large stocks situation, the ending stocks of the remaining six (6) major wheat exporters have declined to at least a 21-year low of 24.4 mmt in “new crop” MY 2018/19. This amount would be down sharply from the recent high of 36.3 mmt in “old crop” MY 2017/18 and from the 34.8 mmt in MY 2016/17.
Rest of the World (ROW) Wheat ending stocks: Excluding the major seven (7) global wheat exporters Argentina, Australia, Canada, the European Union, Russia, Ukraine, and the United States – wheat ending stocks for the Rest of the World (ROW) are projected to increase to a record high 209.1 mmt in “new crop” MY 2018/19. This amount would be up from 206.8 mmt in “old crop” MY 2017/18, and up from 188.8 mmt in MY 2016/17. Excluding China with its current large stocks situation – and limited participation in World wheat trade, the ending stocks of the Rest of the World-less-China have decreased to 122.8 mmt in “new crop” MY 2018/19 (Figure 17). This amount would be down 16.0% from 146.25 mmt in “old crop” MY 2017/18 (2nd highest on record), from 146.1 mmt in MY 2016/17, and the record high of 147.2 mmt in MY 2015/16.
Top 7 Exporters Own % S/U: The projected percent (%) ending stocks-to-use among global wheat exporters including Argentina, Australia, Canada, the European Union, Russia, Ukraine, and the United States are projected to decline to 13.0% in “new crop” MY 2018/19 – down from 16.8% in “old crop” MY 2017/18, from 17.4% in MY 2016/17 and the 21-year high of 22.2% in MY 2009/10 (Figure 15). This amount of 13.0% S/U for the top 7 World wheat exporters is the second lowest in the last 21-years compared to 12.2% in the ‘short crop” 2007/08 marketing year.
Top 7 Exporters Own Stocks as a % of World Use: Relative to total World wheat stocks, the ending stocks of the top 7 World wheat exporters is projected to decline to 19.3% top 7 exporter end stocks / World use in “new crop” MY 2018/19, down from 24.3% in “old crop” MY 2017/18 (2nd lowest), and the lowest proportion since at least MY 1998/99 (i.e., the last 21-years) (Figure 14).
CommentaryKSU: These results show that while aggregate World wheat ending stocks have declined moderately, “under the surface” of those numbers, wheat stocks are projected to be “extremely tight” among World exporters – much tighter than for the rest of the World wheat market. Tightening wheat stocks and % S/U among the top 7 wheat exporters is a positive factor for U.S. wheat market price prospects – since it could eventually lead to larger U.S. wheat exports in “new crop” MY 2018/19. However, a large increase in U.S. wheat export sales and shipments may be “back loaded” in “new crop” MY 2018/19 – after supplies from other major exporters with transportation cost and/or currency exchange rate advantages over the United States have “run short” of exportable supplies.
G. U.S. Wheat Supply/Demand for “New Crop” MY 2018/19 – “Tighter Stocks”
The USDA released their wheat production, supply-demand and price projections for the U.S. for “new crop” MY 2018/19 in the August 10th Crop Production & WASDE reports (Tables 1a-b).
U.S. wheat plantings are forecast to be 47.821 million acres (ma) in 2018, up from the record low of 46.012 ma in 2017, but down from 50.119 ma in 2016 (Table 1, Figure 5-6). Harvested acres are forecast at 39.556 ma in 2018 (82.72% harvested-to-planted), up from the record low of 37.586 ma (81.69% harvested-to-planted) in 2017, but down from 43.850 ma in 2016 (87.49% harvested-to-planted) (Table 1, Figure 6). The 2018 U.S. average wheat yield is estimated at 47.5 bu/ac, up from 46.3 bu/ac in 2017, but down from the 2016 record high of 52.7 bu/acre (Table 1, Figure 7).
Wheat production in the U.S. in 2018 is forecast to be 1.877 billion bushels (bb), up from 1.741 bb in 2017, but down from 2.309 bb in 2016. Projected “new crop” MY 2018/19 total supplies are forecast at 3.112 bb, up from 3.079 bb in “old crop” MY 2017/18, and down from 3.402 bb in MY 2016/17 (Table 1, Figure 8).
U.S. Wheat total use of 2.177 bb is forecast for “new crop” MY 2018/19 (up 80 mb from June, and up 45 mb from July), up from 1.978 bb in “old crop” MY 2017/18, and from 2.222 bb in MY 2016/17 (Table 1, Figure 9). By usage category, in “new crop” MY 2018/19 U.S. wheat exports are projected to be 1.025 bb (up 75 mb from June, and 50 mb from July), and up from 901 mb in “old crop” MY 2017/18, while being down from 1.051 bb in MY 2016/17 (Table 1, Figures 10 & 11).
CommentaryKSU: U.S. wheat exports fell to 47-year lows of 778 mb and 864 mb in MY 2015/16 and MY 2014/15, respectively, down to levels just marginally above those pre-“Russian Grain Deal” in 1972. This is more evidence of the only marginally competitive position in recent years that U.S. wheat exports find themselves in among foreign export competitors. However, tightening supplies of foreign wheat exporters may cause U.S. wheat exports to strengthen in the later part of “new crop” MY 2018/19 (i.e., likely fall 2018)
Food Use of U.S. wheat is projected to be 970 million bushels (mb) in “new crop” MY 2018/19, up marginally from 967 mb in “old crop” MY 2017/18, and trending higher from 949 mb in MY 2016/17 (Table 1, Figure 9). Feed & Residual Use of U.S. wheat is projected to be 120 mb in “new crop” MY 2018/19 (down 10 mb from July), up from 48 mb in “old crop” MY 2017/18 (down 22 mb from June, and down 2 mb from July), and from 161 mb in MY 2016/17 (Table 1, Figure 9).
CommentaryKSU: With the USDA’s forecast of tighter U.S. corn and total feedgrain supplies along with higher feedgrain prices, the USDA is anticipating that feeding wheat to livestock will become more economically viable compared to a year earlier – even with the 10 mb decline in the current marketing year forecast of feed & residual use.
The USDA projected “new crop” MY 2018/19 ending stocks to be 935 mb (42.95% S/U). Ending stocks of 935 mb are down 50 mb from July, while 42.95% S/U are down from 46.2% S/U in the July WASDE report. Ending stocks of 935 mb (42.95% S/U) for “new crop” MY 2018/19 are down substantially from 1.100 bb in “old crop” MY 2017/18 (55.6% S/U), and from 1.181 bb in MY 2016/17 (53.15% stocks/use) (Table 1, Figures 11 & 12).
CommentaryKSU: This projection of 935 mb in U.S. wheat ending stocks in “new crop” MY 2018/19 is the lowest in five (5) years – since 752 mb (37.3% stocks/use) in MY 2014/15. Still, until either a major wheat production shortfall or what could be an “anticipated” surge in U.S. wheat exports occurs, the U.S. will likely remain in the current “large supply – large ending stocks” situation.
United States’ wheat prices are projected to be in the range of $4.60-$5.60 /bu – averaging $5.10 /bu in “new crop” MY 2018/19 (up $0.10 /bu from July). This would be up from $4.73 /bu in “old crop” MY 2017/18, from $3.89 in MY 2016/17, and $4.89 /bu in MY 2015/16, but still down from $5.99 /bu in MY 2014/15 (Table 1, Figures 11 & 12).
CommentaryKSU: It is estimated by KSU that these USDA projections for “new crop” MY 2018/19 have a 60% probability of occurring.
H. Three “Alt” KSU U.S. Wheat S/D Forecast Scenarios for “New Crop” MY 2018/19
To represent possible alternative outcomes from the USDA’s July 12th projection, three potential KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “new crop” MY 2018/19 (Table 1a).
KSU Scenario 1) “MODERATELY Higher Exports” Scenario (15% probability): This scenario assumes that there will be 1.877 bb production, 3.112 bb total supplies (both same as USDA), 1.075 bb exports (up 50 mb from USDA), 120 mb feed & residual use, 2.227 bb total use (up 50 mb from USDA), 885 mb ending stocks (down 50 mb from USDA), 39.7% Stocks/Use (down from 42.95% S/U by USDA), & $5.35 /bu U.S. wheat average price (up $0.25 /bu from USDA).
KSU Scenario 2) “MUCH Higher Exports” Scenario (10% probability): This scenario assumes that there will be 1.877 bb production, 3.112 bb total supplies (both same as USDA), 1.200 bb exports (up 125 mb from USDA), 120 mb feed & residual use, 2.352 bb total use (up 125 mb from USDA), 760 mb ending stocks (down 200 mb from USDA), 32.3% Stocks/Use (down from 42.95% S/U by USDA), & $5.90 /bu U.S. wheat average price (up $0.80 /bu from USDA).
KSU Scenario 3) “Lower Exports” Scenario (15% probability): This scenario assumes that there will be 1.877 bb production, 3.112 bb total supplies (both same as USDA), 925 mb exports (down 100 mb from USDA), 120 mb feed & residual use, 2.077 bb total use (down 100 mb from USDA), 1.035 bb ending stocks (up 100 mb from USDA), 49.8% Stocks/Use (up from 42.95% S/U by USDA), & $4.80 /bu U.S. wheat average price (down $0.30 /bu from USDA).
CFTC Position of Traders Info for CME KS HRW Wheat Futures through 8/21/2018
Figures 3a-c present the latest available Position of Traders data through August 21, 2018 on CME Kansas Hard Red Winter Wheat futures from the Commodity Futures Trading Commission (CFTC).
Figure 3a shows Net Position of Traders for CME KS HRW Wheat with Futures Prices from June 2006 through August 21, 2018. This chart shows the positions of Commercial Hedgers, Managed Money (Specs), and Swaps (Indexes) over time, along with changes in lead KS HRW Wheat futures.
Commercial hedgers are designated as those traders who are involved with cash wheat positions and are primarily managing the risk from futures movements in their positions (i.e., they are “hedging” futures). This chart shows the net position of commercial hedgers, showing the balance of both long and short futures positions. In Figure 3a, commercial hedgers have been net short or in predominantly “sell” positions in CME KS HRW Wheat futures throughout most of 2018.
Managed Money (Specs) generally are involve in speculative trading positions in an effort to profit from their trading activities. Speculative trades add volume or liquidity to the market – allowing commercial hedgers to manage their cash market price risks. Figure 3a shows that managed money (specs) traders have been net long or in predominantly “buy” positions in CME KS HRW Wheat futures throughout most of 2018.
Swaps (Index) traders include commodity index traders who involve agricultural commodity futures such as KS HRW Wheat in their investment portfolios typically as an “inflation hedge.” Figure 3a shows that swaps (index) traders have been consistently net long or in predominantly “buy” positions in CME KS HRW Wheat futures throughout most of 2018 and actually since June 2006 – which is consistent with their portfolio-risk management oriented strategies.
Figure 3b provides Commercial Traders (Hedgers) Long & Short Positions for CME KS HRW Wheat with Futures Prices from June 2006 through August 21, 2018. This chart shows that the “short” or “sell” positions of commercial hedgers have been consistently larger than “long” or “buy” positions since July 2017.
Figure 3c illustrates Managed Money Traders (Specs) Long & Short Positions for CME KS HRW Wheat with Futures Prices for the June 2006 through August 21, 2018. This chart shows a large amount of volatility and change in the positions of “short” or “sell” positions of managed money traders (specs), but relative consistency in their aggregate amount of “long” or “buy” positions over the same period of time. It is likely that in the next CFTC report on August 28th that the short or sell positions of managed market or spec traders will have expanded sharply – consistent with the sharp decline in CME Kansas HRW wheat futures since August 21st.