An analysis of U.S. and World wheat supply-demand factors and 2018-2019 price prospects following the June 12 USDA Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports, and the market actions that have followed those reports are available on the KSU AgManager website (http://www.agmanager.info/).
Following is a summary – with the full analysis-article for Wheat to be found at this web location:
Wheat Market Outlook in Mid-June 2018
Daniel O’Brien – Extension Agricultural Economist, K-State Research and Extension
June 14, 2018
A. Wheat Futures & Cash Market Trends Following the June 12th USDA Reports
Since the USDA’s June 12th Crop Production and World Agricultural Supply and Demand Estimates (WASDE) report, CME JULY 2018 Kansas Hard Red Winter (HRW) Wheat futures have traded first higher and then lower again. These reports were released during a time of harvest price pressure, when 2018 hard red winter wheat harvest was over half done in Oklahoma and Texas, and beginning in Kansas. On the day of the report (June 12, 2018), JULY 2018 Kansas HRW wheat futures opened at $5.34 ½ and traded as high as $5.55 ½ before closing higher to $5.53 ½ that day. The following two days JULY 2018 HRW wheat futures trended lower, closing at $5.39 /bu on Wednesday, June 13th and $5.22 ¼ /bu on Thursday, June 14th (Figure 1).
On June 14th – the 2nd day after the USDA reports – Kansas cash wheat price terminal quotes in central and eastern Kansas ranged from $5.02 ¼ to $5.42 ¼ per bushel – with basis ranging from $0.20 under to $0.20 over JULY 2018 futures (Figure 2). These prices are up 41%-47% 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 terminal Hard White Wheat (HWW) bid was available in Wichita, Kansas for $5.37 ¼ /bu, with a basis of $0.15 /bu over JULY 2018 Kansas HRW wheat futures.
In western Kansas on June 14th with harvest well underway to the south, representative wheat elevator bids ranged from $4.72 to $5.07 /bu, with basis being from $0.50 under to $0.15 under JULY 2018 futures. These recent wheat cash price levels are up 36%-39% from $3.47 to $3.64 /bu in late December 2018 in western Kansas – when local basis varied from $0.85 under to $0.58 under MARCH 2018 futures.
Lower 2018 production, higher protein levels in drought-damaged parts of the central and southern plains states of Texas, Oklahoma and Kansas, and to some degree foreign wheat crop concerns in competitive export countries such as Ukraine, Russia, and Australia, are the key market influencing factors credited for the increase in Kansas HRW wheat futures and cash prices since December 2017. With this prices strength, local wheat basis levels in Kansas that were “wide and weak” in December 2017 have strengthened by $0.59-$0.60 /bu in central Kansas, and by $0.35-$0.43 /bu in western Kansas as of June 14.
B. Early Harvest HRW Wheat Yield & Protein Results
Harvest results to date have shown low yields but higher protein in Oklahoma and parts of southern Kansas. The June 8th Harvest Report of the U.S. Wheat Associates (http://www.uswheat.org/harvest) stated:
“Yields continue to be variable with a current average estimated at under 25 bu/ac (1.7 tons/ha). Hot temperatures forecast for next week (i.e., June 11-15) should push maturity. The first 60 samples are in for analysis with averages from 17 samples originating in Oklahoma reported. Test weights with a few exceptions ran above 60 lb/bu (78.9 kg/hl), which is a bit of a surprise given the environmental conditions in the area. Protein averaged between 11% and 12% (12% moisture basis).”
A report via Reuters indicates the following (“U.S. Grain Buyers Grab for High-Protein Wheat, Boosting Cash Prices.”, Reuters – Julie Ingwerson, June 14, 2018):
“Cash prices for hard red winter (HRW) wheat in the southern U.S. Plains are surging as buyers scramble to lock up supplies of high-protein wheat from what could be the second-smallest crop in decades, traders said. Amid a global shortage of high-protein wheat, commercial grain handlers need the new-crop grain to blend into their stocks to salvage the lower-quality wheat left in their bins from last year. …….”
“The firm cash market reflects buyers’ hunger for high-protein wheat after two consecutive low-protein harvests that averaged 11.5 percent or less. Flour millers and exporters largely spurned the 2016 and 2017 HRW wheat harvests, seeking alternate supplies from outside of Texas, Oklahoma and Kansas. ……. Early returns from the 2018 harvest have been encouraging. Protein levels in HRW wheat samples from Oklahoma and southern Kansas have averaged 13 percent, according to weekly data from Plains Grains Inc., a trade group that conducts a wheat quality survey, and the Kansas Wheat Commission.”
Consequently, the lower yields occurring during early harvest 2018 in these central and southern plains states are being partially offset income-wise by higher protein wheat. On a net income per acre basis, farmers are still likely to be worse off financially, as the higher price received for higher protein content HRW wheat does not compensate enough for the lower yield to sell on a per acre basis.
C. Key World Wheat Supply-Demand Results in the June 12th USDA WASDE Report
For the “new crop” 2018/19 marketing year (MY) beginning on June 1, 2018, the USDA projected the following (Figures 13 through 15b, Tables 2 through 9):
World wheat total supplies in “new crop” MY 2018/19 would be a record high 1,017.1 million metric tons (mmt) accompanied by record high total use of 750.9 mmt – up 0.1% and 1.0%, respectively, from “old crop” MY 2017/18. The USDA in essence projects that the recent “large supply – large use” situation that has persisted since the last “supply-demand” period in MY 2012/13 will continue (Figure 13). Concerns about 2018-2019 wheat crop production prospects in the Black Sea Region, Australia, and the U.S. could bring lower production and supplies – possibly causing World wheat supply-demand balances to decline in upcoming WASDE reports. However, if these World wheat production reductions do NOT occur, then the current World wheat oversupply and associated low price situation is likely to persist.
CommentaryKSU: These aggregate World supply and use numbers do NOT bring light to the shortage of high protein wheat that exists in World markets, OR the sizable wheat stocks held by China that are isolated from the World wheat market.
World wheat exports will also be a new record high 187.3 mmt in the “new crop” 2018/19 marketing year – up from a 182.8 mmt in “old crop” MY 2017/18, the previous record high of 183.3 mmt in MY 2016/17, and from 172.8 mmt in MY 2015/16 (Figure 13, Table 3). While World wheat exports are forecast to increase by 12.9% since MY 2013/14 (i.e., 1 year after the short crop year of MY 2012/13), United States’ wheat exports are projected to decline by 19.2% from 1.176 billion bushels to 950 million bushels (mb) in “new crop” MY 2018/19.
CommentaryKSU: This lack of growth in U.S. exports relative to foreign export competitors raises questions about whether the U.S. should focus more on HRW wheat protein and quality characteristics to differentiate it’s exportable wheat product. Also, a strengthening in the U.S. dollar exchange rate relative to export competitors with weak currency exchange rates continues to be a negative factor limiting the competitive affordability of U.S. wheat exports in World markets.
World wheat ending stocks are projected to be 266.2 mmt in “new crop” MY 2018/19 – the 2nd highest on record following the high of 272.4 mmt in “old crop” MY 2017/18 (Figure 13, Table 8). World wheat ending stocks have been growing an average of 14.7 mmt per marketing year from the low of 177.9 mmt in MY 2012/13, out-pacing the annual growth in total use of 10.6 mmt per marketing year – leading to growth in ending stocks.
World wheat percent ending stocks-to-use (S/U) are forecast to be 35.45% in “new crop” MY 2018/19 – the 2nd highest on record (Figures 14a-b, Table 9). The record was 36.65% in “old crop” MY 2017/18. World wheat % stocks-to-use consistently increased each year from 25.89% in the short crop MY 2012/13 to current levels of 36.65% S/U in “old crop” MY 2017/18, and the USDA projection of 35.45% in “new crop” MY 2018/19.
CommentaryKSU: These results provide evidence that pace of growth in World wheat supplies has been faster than growth in total use since MY 2012/13 – leading to the current World oversupply situation and lack of sales opportunities and weaker prices for wheat of average protein and quality characteristics.
D. “World-Less-China” Wheat Supply-Demand & the “China Supply Isolation” Factor
The broader “large crop-over supply-low price” situation in the World wheat market may be “obscuring” some important underlying market issues – particularly in regards to the “masking” effect of Chinese wheat stocks on available World wheat supplies and stocks.
Total supplies and % ending stocks-to-use of wheat in World markets is projected to grow to record levels – with World wheat ending stocks-to-use of 35.45% in “new crop” MY 2018/19 (Figures 13 thru 14b, Table 8). However, from a “World-Less-China” perspective, forecast ending stocks-to-use of 20.2% would be the lowest level in 11 years (Table 9, Figures 15a-b). “World-Less-China” wheat ending stocks-to-use would be down sharply from 23.2% 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 aggregate global supplies over TO available “World-Less-China” supplies the attention of the World wheat market may not change in this direction.
E. U.S. Wheat Supply/Demand for “New Crop” MY 2018/19
The USDA released their wheat production, supply-demand and price projections for the U.S. for “new crop” MY 2017/18 in the June 12th Crop Production & WASDE reports (Tables 1a-b).
U.S. wheat plantings are forecast to be 47.339 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). Harvested acres are forecast at 38.9 ma in 2018 (82.3% harvested-to-planted), up from the record low of 37.586 ma (81.7% harvested-to-planted) in 2017, but down from 43.850 ma in 2016 (87.5% harvested-to-planted) (Table 1, Figure 5). The 2018 U.S. average wheat yield is estimated at 46.9 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 6).
Wheat production in the U.S. in 2018 is forecast to be 1.827 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 3.043 bb, down from 3.076 bb in “old crop” MY 2017/18, and down from 3.402 bb in MY 2016/17 (Table 1, Figure 7).
U.S. Wheat total use of 2.097 bb is forecast for “new crop” MY 2018/19, up from 1.996 bb in “old crop” MY 2017/18, and from 2.222 bb in MY 2016/17 (Table 1, Figure 8). By usage category, U.S. wheat exports are projected to be 950 mb in “new crop” MY 2018/19, up from 900 mb in “old crop” MY 2017/18, while being down from 1.055 bb in MY 2016/17 (Table 1, Figures 9 & 10).
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, to levels just marginally above those pre-“Russian Grain Deal” in 1972. This is more evidence of the only marginally competitive position that U.S. wheat exports find themselves in among foreign export competitors I recent years.
Food Use of U.S. wheat is projected to be 965 million bushels (mb) in “new crop” MY 2018/19, up marginally from 963 mb in “old crop” MY 2017/18, and trending higher from 943 mb in MY 2016/17 (Table 1, Figure 8). Feed & Residual Use of U.S. wheat is projected to be 120 mb in “new crop” MY 2018/19, up from 70 mb in “old crop” MY 2017/18, and from 156 mb in MY 2016/17 (Table 1, Figure 8).
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.
The USDA projected “new crop” MY 2018/19 ending stocks to be 946 mb (45.1% Stocks/Use), down from 1.080 bb in “old crop” MY 2017/18 (54.1% stocks/use), and 1.181 bb in MY 2016/17 (53.15% stocks/use) (Table 1, Figures 11 & 12).
CommentaryKSU: The anticipation of markedly lower U.S. 2018 HRW wheat production is having the end effect on U.S. wheat supply-demand balances of dropping ending stocks below 1.00 bb and ending stocks-to-use below 50%. To move ending stocks and % stocks-to-use much lower, it may be necessary to sharply increase U.S. wheat exports and total usage.
United States’ wheat prices are projected to average $5.10 /bu in “new crop” MY 2018/19, up from $4.75 /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). It is estimated by KSU that these USDA projections for “new crop” MY 2018/19 have a 60% probability of occurring.
F. Three Alternative KSU U.S. Wheat S/D Forecast for “New Crop” MY 2018/19
To represent possible alternative outcomes from the USDA’s June 12th projection, three potential KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “new crop” MY 2018/19 (Table 1a, Figure 11).
KSU Scenario 1) “Lower Production” Scenario (25% probability): This scenario assumes that there will be 47.339 ma planted, 80.6% harvested-to-planted, 38.155 ma harvested, 45.0 bu/ac average yield, 1.717 bb production, 2.932 bb total supplies, 950 mb exports, 120 mb feed & residual use, 2.097 bb total use, 835 mb ending stocks, 39.82% Stocks/Use, & $5.75 /bu U.S. wheat average price.
KSU Scenario 2) “Higher Exports” Scenario (15% probability): This scenario assumes that there will be 47.339 ma planted, 80.6% harvested-to-planted, 38.155 ma harvested, 46.9 bu/ac average yield, 1.827 bb production, 3.043 bb total supplies, 1.125 bb exports, 120 mb feed & residual use, 2.272 bb total use, 771 mb ending stocks, 33.93% Stocks/Use, & $6.20 /bu U.S. wheat average price.
KSU Scenario 3) “Lower Production & Higher Exports” Scenario (5% probability): This scenario assumes that there will be 47.339 ma planted, 80.6% harvested-to-planted, 38.155 ma harvested, 45.0 bu/ac average yield, 1.717 bb production, 2.932 bb total supplies, 1.125 bb exports, 120 mb feed & residual use, 2.272 bb total use, 660 mb ending stocks, 29.05% Stocks/Use, & $6.55 /bu U.S. wheat average price.