Grower Options For Insured Wheat Damaged By Late Winter Storm (Monte Vandeveer – KSU Ag Economist)

Following is an article by Monte Vandeveer, Extension Agricultural Economist with Kansas State University, concerning grower options for insured wheat damaged by the recent late winter storm in Kansas. A full version of the article is available on the KSU AgManager Website at the following web address:

http://www.agmanager.info/grower-options-insured-wheat-damaged-late-winter-storm

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Grower Options For Insured Wheat Damaged By Late Winter Storm

Monte Vandeveer (montev@ksu.edu), Kansas State Univ., Dept.  of Ag Economics, May 2017

The late winter storm which struck western and central Kansas, along with areas in neighboring states, caused cold-weather damage to the crop which was progressing into its later developmental stages.  A publication from K-State’s Department of Agronomy, Spring Freeze Injury to Kansas Wheat,” shows how wheat’s resistance to freeze injury varies with different stages of development, along with the types of injury due to low temperature and their effects on yield at later stages of plant development.

Another risk faced by growers is the problem of bent or broken stalks, pressed down by a foot or more of heavy wet snow from the storm.  K-State’s Department of Agronomy issued an e-Update on May 1 about the severe conditions across the state and the likelihood of wheat damage.   Agronomists advise that it may be several days before the extent of damage is known in some cases.

Fortunately, most wheat acres in Kansas are insured; in fact, the state typically has over 90 percent of its planted wheat acres covered by crop insurance.  Step 1 after potential damage to the crop is always prompt notification of one’s insurance agent.

With damage across such a wide area, the next challenge will be to schedule a loss adjustment.  Once the adjuster provides an appraisal, the acres will be released for other use.  If a grower disagrees with the appraisal of the damaged crop, he/she will need to leave intact strips in the field for later harvest and final resolution of the wheat claim.

What would a complete loss be worth? 

Assume a producer has a 40-bushel Actual Production History yield for insurance, along with the $4.59 Projected Price (determined prior to planting) to get an expected revenue of $183.60 per acre.  Combine this with an insurance guarantee level of 75% to get coverage worth $137.70 per acre for a complete wipe-out.

In general, insurance rules do permit the planting of a second crop when an insured first crop fails.  The Risk Management Agency indicates the following options are permitted for an insured wheat crop that has failed, provided it had not already headed out:

  • The acreage may be left idle (black dirt), or planted to a second crop and not insured, and receive a full indemnity for the first insured crop;
  • Plant and insure a second crop and receive a 65-percent reduction in indemnity for the first insured crop – you pay 35 percent of the premium for the first insured crop;
  1. If there is not a loss on the second crop, you will receive the remaining 65 percent of indemnity on the first insured crop and pay the full premium on the first insured crop; or
  2. If the second crop receives an indemnity, the first crop indemnity remains at 35 percent and the second crop indemnity is fully paid (no reduction). You may choose to not accept the second crop indemnity and receive a full indemnity on the first insured crop.

For most non-irrigated western Kansas growers, the likely second crop is grain sorghum.  Optimal seeding dates still lie in the future, farmers are already quite experienced with it, it is well-adapted to hot, dry western Kansas summers, and it is easily marketed.

For the example above, the producer could take 35 percent of the wheat indemnity, or $48.20 per acre, then plant grain sorghum as a second crop, and insure it.  If the grain sorghum has no loss, the producer would receive the remaining 65 percent of the wheat indemnity, $89.50 per acre, once the grain sorghum crop was harvested.  A second option would be to take the entire wheat indemnity of $135.70 per acre, still plant the grain sorghum, but leave it uninsured.

What should producers do with the damaged wheat crop in the meantime?

Again, producers need to wait until an adjuster inspects their fields and releases the acres before taking other steps.  Once an adjuster has made an appraisal and the acres are released, a producer may handle the damaged crop in any manner he/she desires.  This includes making hay or silage from the damaged crop, if conditions permit.

These rules apply for wheat that HAD NOT already headed out.  Of course, plant maturities vary widely across the storm area due to different varieties, planting dates, etc., and some wheat had already headed out.  Wheat which had in fact headed out prior to this storm is of course eligible for a full indemnity, but no second crop may be insured. 

If the damaged wheat was a summer-fallow crop and it is destroyed by June 1, producers can go back and plant wheat on those same acres this fall and have them considered as grown under summer-fallow practice.  If the damaged wheat is not destroyed by June 1 and wheat is planted there again this fall, it would be considered continuous cropping wheat.

Producers are reminded to consult with their crop insurance agent to ensure compliance with insurance program rules and maintain their eligibility for insurance coverage.

KSU Weekly Grain Market Analysis: Kansas Wheat Tour Graphics, Corn and Soybean “Next Crop” MY 2017/18 Scenarios

Grain market summary notes, charts and comments supporting the Grain Market Update presented in the KSU Agriculture Today radio program to be played on Friday, May 5, 2017 are available on the Kansas State University www.AgManager.info website at the following KSU web address:

http://www.agmanager.info/sites/default/files/pdf/KSRN_GrainOutlook_05-05-17.pdf

The recorded radio program will be aired at 10:03 a.m. central time, Friday, May 5, 2017 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the May 5th recording will available at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

KSU Article on “What Caused Wheat Basis to Widen by a Dollar?” on AgManager.info

What Caused the HRW Wheat Basis to Widen by a Dollar?

Kansas State University Extension Agricultural Economist Daniel O’Brien, Elizabeth Yeager, and Art Barnaby met with several Kansas grain industry participants including farm cooperative grain elevators, independent stock-held grain elevators, flour millers, a House of Representative staffer, a commodity broker, representatives of U.S. Wheat Associates and the Kansas Wheat Growers Association, and the Chicago Mercantile Exchange (CME) at various locations around the state during April 10-12, 2017 to discuss current Hard Red Winter (HRW) wheat marketing issues.  Our meeting tour included both non-delivery and delivery elevators, and our primary question was why non-convergence was occurring between CME Kansas HRW wheat futures and local cash wheat prices.  However, many other topics were covered by this group of professionals with different interests in the wheat market.  At the link below is a summary of the information provided by these various industry professionals.  Thanks to each of them for sharing their time.

Read more at: http://www.agmanager.info/crop-insurance/risk-management-strategies/what-caused-hrw-wheat-basis-widen-dollar

Following are key points from the  complete article.

What Caused the HRW Wheat Basis to Widen by a Dollar?

Point #1) Grain Storage Rates as a function of Supply-Demand

Straight from “Econ 101:” – when something is in short supply (storage), the price increases and rations the available supply.  The storage rate in the HRW futures contract is fixed and is below its real market value at this time. Therefore, the only adjustment to be made in this situation is a widening basis in the futures contract to compensate.  It was argued that allowing the storage rate to increase to reflect the true market value of storage would then allow the basis to adjust, and subsequently cause futures and cash prices to converge.

Point #2) Raising Fixed Storage Rates on Delivered Wheat vs VSR Adoption

The CME considered two primary options that would allow the storage rate in the CME Kansas HRW wheat futures contract to reach market value: a)  an increased fixed storage rate, and b)  a Variable Storage Rate (VSR)

Point #3) VSR Adoption by the CME & Associated Concerns

On April 24, 2017, the CME announced that the Variable Rate Storage (VSR) would be applied to the HRW wheat futures contracts, effective Sunday, March18, 2018. The CME-announced change occurred after our return, but it was clear during our tour that the VSR would be a controversial change.  It was the perception of some participants in these discussions that adoption of a VSR mechanism would add uncertainty to long-term hedgers of Kansas HRW wheat futures.

They were concerned that the VSR mechanism had the potential for increasing the hedging uncertainty for bakers and others who use wheat futures to hedge food production process input price risk.  Under the VSR, these long hedgers have a new risk of a storage rate change without a limit on the increase.  They preferred a fixed rate that provided certainty in the storage cost.  They argued that under an “increased fixed storage rate” scenario, the carry in the futures market would allow an increase in the storage rate to reflect the market value of storage during periods of large inventories.  An increased fixed storage rate would allow for faster storage adjustments than the VSR.

Point #4) Separation of VSR and Storage Rates at Local Elevators

Any adjustments made to the storage rate in the HRW wheat futures contract are unlikely to affect the farmer-paid storage rates at their local country elevator.  Increasing country elevator storage rates will increase the incentive for farmers to build their own on-farm storage.  One could even argue that these country and terminal elevators have kept the storage rate artificially low for both long-term economic and customer relation reasons, causing farmers and competing elevators to under invest in storage.  The idea is that once farmers build their own on-farm storage, they are not likely to return to their local country elevator to store grain, but rather use their own facilities. Many of those elevators would then be left with open storage space earning no return in the future when crops are more normal in size.

Point #5) Determining the Cash Price where Cash-Futures Convergence Occurs

One non-delivery elevator manager challenged the argument there was convergence for 11% protein wheat in KC on a rail car.  He stated that if that were a real cash offer, he would ship them a train load of wheat by the end of the week.  We are not sure if the argument matters, because delivery would take place with the greatest market advantage for the delivery elevator and most of the delivered wheat was in Salina.  From the viewpoint of this manager, he had limited access to the KC rail grain market.  With limited access, there would be no way for arbitrage and/or market participation to occur.  Some even question if KC should even be a delivery point because wheat no longer flows through KC, as most HRW wheat goes from terminal elevators to the Gulf or to millers predominantly located in central Kansas.  Why would one expect wheat shipped from Hutchinson, KS or Enid, OK to go to KC before going to the Gulf?

Point #6) Wheat Protein Issues

The issue of how high-protein wheat was handled in the Kansas grain elevator system was discussed, and the degree to which higher proteins were paid for in the Kansas wheat handling and marketing system. What these elevators really pay on is the average protein for the crop, so if one is harvesting wheat in an area with higher protein, then the bid is higher.  However, in the Kansas wheat market with its predominantly bulk blending practices, farmers are paid based on the average protein for the crop.  Therefore, the farmer with 13% protein gets the same price as a farmer with 10% protein, unless they store wheat on-farm in a segregated manner for later sale and capture the protein premium.  We were also told that because of intense harvest pressures, Kansas grain elevators don’t have the time to separate the wheat crop by protein during harvest.

Point #7) Wheat Genetics Impact on Protein & Regional Market Differences

One manager was of the opinion that the KSU wheat breeding program focused too much on yield and not enough on wheat milling quality and higher protein levels.  However, in the current Kansas grain handling system, there are only limited price signals sent through to farmers for high quality wheat under the current marketing system.  This is because farmers are paid predominantly on crop size or “bushels” only.  Price premiums are “implicit” in the price paid.  Higher wheat prices are paid for regions of the state where protein is higher and lower prices for poorer protein regions within any one year.  However, if there are any protein premiums being factored into local wheat prices they are not generally visible to the farmer.

Point #8) Tie-in Between Onfarm Storage & Marketing High Protein HRW Wheat

The general conclusion of these discussions was that farmers who can consistently produce high-quality, high-protein wheat in the Southern Plains region would need to have their own storage facilities to capture any premiums, given the current bulk handling system that exists.  The question is whether they can consistently produce such high protein wheat in order to gain the price premiums. In addition, farmers who want to capture basis improvement will need to own the physical wheat, either in their own storage or in commercial storage.  However, under current conditions, many experts are expecting it will likely require a couple of years before HRW wheat futures and cash converge.  It is unlikely many farmers can afford to carry grain inventory for two years.  In addition, most Kansas wheat producers would need to make greater use of post-harvest storage hedges and/or forward contracts, to regularly capture market carry.

Point #9) Rail Cost Differences by Type of Grain

Perhaps the most revealing finding of these meetings was the amount of the differential in freight rates for different types of grain.  For example, the Burlington Northern and Santa Fe railway (BNSF) charges a higher rate for wheat than grain sorghum for a unit train going from the same location and with the same total freight weight to the Gulf.  The bottom line, the railroad charges what the market will bear.  Wheat has to go to the Gulf, while grain sorghum can be consumed as a feed grain within trucking distance.  Those higher freight rates are then passed back to the wheat farmer in the form of lower cash wheat prices.  Any legislation or regulations that favor truck traffic for longer hauls of grain would provide more competition to railroads in grain markets.  However, longer hauls of grain are likely to continue to favor rail transportation, given the scale of the economies involved.

Point #10) Non-convergence Impact on Crop Revenue Insurance Coverage

It is true that when there is no convergence in futures and cash, the crop revenue insurance contract pays less for a claim when prices fall.  Some farmers have argued that crop insurance claims should be paid based on cash prices.  The problem is: what cash price to use in the calculations?  The Agriculture Risk Coverage (ARC) program settles claims based on USDA’s national average cash price, but that means farmers must wait a year or more for payments.  More importantly, when there is a crop failure and prices increase, then farmers are paid for indemnity bushels only after the deductible measured in bushels is applied.  Farmers will have those indemnity bushels replaced at the futures price.

However if claims were based on cash prices, western Kansas wheat farmers would have their indemnity compensated at a price that would be 40 to 50 cents lower than the current method.  When there is a short crop and the wheat prices increase, most farmers would need to lose at least 25% of their expected bushels before collecting any payments, so it is not a good time to have one’s indemnity payments cut by a change in the price calculation.

Point #11) Other Topics Discussed

There was also extensive discussion of other issues such as:

  1. whether the use of shipping certificates would be advantageous for the Kansas wheat contract;
  2. if some form of rail or track delivery on either an individual rail car or a 110 car train basis were feasible;
  3. the tradeoffs between carrying charges and basis levels in Kansas wheat price determination;
  4. the pattern of grain storage utilization in Kansas and the U.S. grain system, and how growth in inventories has contributed to the current “wide basis” situation in wheat;
  5. whether inclusion of a cooperative elevator among designated delivery facilities would impact price convergence; and
  6. the important role of Gulf wheat export prices in cash wheat price determination in Kansas after transportation adjustments.

In addition, the pattern of increasing rail rates to the Gulf over time and its impact on Kansas wheat basis levels was also examined.

Point #12) Inability of Farmers to Deliver Against CME KS HRW Wheat Futures

It was clear from our discussion that farmers have no right to deliver wheat (any grain) on a futures contract.  Therefore, farmers should not enter the delivery period holding a short future’s position thinking they have delivery rights.  In addition, it was argued that the change to VSR would be of the greatest benefit to farmers who already have their own on-farm storage.  However, at least one person suggested that farmers may over-invest in storage and eliminate farm storage returns in the future.

Final Thoughts: The Need For “Balance” in Grain Futures Deliver Mechanisms

These discussions were of great benefit to those of us from Kansas State University, and provided us a practical, industry level perspective, a viewpoint that is often missing from more “esoteric” academic theory-oriented viewpoints about how markets function.

If a market delivery system is “unbalanced” between the “short” sellers who at times may seek to make delivery of grain, and the “long” buyers who may be forced to take those same deliveries, it hurts the longterm viability and usefulness of the futures contract. In this case the disadvantaged side of these transactions will likely act to limit their risk exposure – possibly by just not participating in trading the futures contract at all.  Consequently, for the sake of market liquidity (i.e., maintaining a healthy pool of both sellers and buyers) and effective futures contract function, such grain futures market delivery mechanisms need to be “fair” to both sides of the transaction.

If the settlement and/or delivery mechanism for an agricultural futures contract such as CME Kansas HRW Wheat futures is not thought to be “fair” by one side of the transaction or the other, then either “shorts” or “longs” may choose not to use the contract at all.  Then if trading volume of the futures contract decreases as traders take their business elsewhere, the effectiveness and usefulness of the CME Kansas HRW Wheat futures contract as a price discovery and risk management tool would drastically decline.

 

 

 

KSU Corn Market Outlook in Early-May: Alternative Crop Production and Price Scenarios for MY 2017/18

This article provides an analysis of U.S. and World corn supply-demand factors and price prospects for both the “new crop” 2016/17 marketing year following the USDA’s April 11, 2017 USDA Crop Production and https://www.usda.gov/oce/commodity/wasde/latest.pdf reports.

Following is a summary of the article on “Corn Market Outlook in Early-May 2017″ with the full article and accompanying analysis soon to be available on the KSU AgManager website (www.AgManager.info) at the following web address:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter/corn-market-outlook-early-may-2017

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Summary

Overview & Summary

Since the USDA’s April 11th World Agricultural Supply and Demand Estimates (WASDE) report, MAY 2017 CME corn futures have been moderately volatile – moving both higher and lower within the range of $3.54 ¼ to $3.73.  “Current” MY 2016/17 U.S. corn prices have found some support at levels above local marketing loan rates because of the positive impact that low prices have had on the use of U.S. corn in ethanol production, wet corn milling, exports and to a moderate degree in livestock feeding.   In addition, the February 23-24 USDA 2017 Agricultural Outlook Forum together with the March 31st Prospective Plantings report have forecast fewer U.S. corn planted acres in 2017, and with a return to trend line U.S. corn yields, lower 2017 U.S. corn production of 14.065 billion bushels (bb) versus the record highs of 15.148 bb in 2016.

However, projections of ending stocks of U.S. corn staying above 2 billion bushels (bb) coupled with ending stocks-to-use above 15% in both “current” MY 2016/17 and “next crop” MY 2017/18 has limited any significant corn futures or cash market price rallies to date in Spring 2017.   IF excessive moisture conditions that have developed in the U.S. Corn Belt in late April – very early May were to continue until mid-May and significantly delay planting progress – THEN increased concerns about 2017 U.S. corn production prospects could lead to higher U.S. corn prices in late-Spring – Summer 2017.

Cash corn prices at major grain elevators in central and western Kansas ranged from $3.04 to $3.31 on Monday, May 1st.  This represents a marked increase since October-December 2016 when prices had fallen below $3.00 per bushel – down to $2.66-$2.96 on December 23rd – although not as low as marketing loan rates near $2.05 (central KS) to $2.19 (western KS) per bushel.  Cash corn prices in east central and northeast Kansas – near river terminal locations – were near $3.55 on May 1st, up from the range of $3.26-$3.28 per bushel on 12/23/2016.  Cash corn prices at Kansas ethanol plants on May 1st ranged from $3.38 to $3.73 – indicating continuing strength in ethanol demand in Kansas and nationwide.  While the “large supply and tight storage availability” situation still predominates in local Kansas grain markets, it is a positive market signal that corn usage has not declined, and that Kansas cash corn prices have enough support to have avoided falling down to USDA loan rate levels.

Other Factors Potentially Affecting the U.S. Corn Market

Other factors that could affect the U.S. corn market in 2017 include the following:

  • First, the pace and timing of U.S. farmer marketing of the 2016 corn crop – much of which had been placed in storage after fall harvest and likely has been held for sale through the winter into at least early spring 2017.
  • Second, anticipation of continued strong use of 2016 crop U.S. corn for domestic U.S. ethanol production and livestock feeding through spring-summer 2017.
  • Third, at least moderate continued strength in U.S. corn exports – at least until what is forecast to be a sizable 2nd crop of corn from South America becomes available on global markets during Summer 2017.
  • Fourth, the always present possibility of broader U.S. and Foreign economic and/or financial system disruptions that could impact grain, energy, and other commodity markets in 2017.  World geo-political events have the potential to provide “shocks” to U.S. and World energy and grain markets – with the impact on the direction of U.S. and World corn markets being difficult to anticipate depending on which countries may be involved and their role in global corn export trade.

USDA Supply-Demand Forecast for “Next Crop” MY 2017/18

With early USDA projections of 2017 U.S. corn plantings of 89.996 million acres or ‘ma’ (down 4.0 ma).   Harvested acres of approximately 82.4 ma (down 4.35 ma) are forecast, with projected yields of 170.7 bu/ac (vs the record high of 174.6 in 2016), leading to a 2017 U.S. corn production is forecast to be 14.065 bb – down from the record high of 15.148 bb in 2016.

The USDA forecast “next crop” MY 2017/18 total supplies to be 16.435 bb – down 505 mb from last year’s record high.  Total use is forecast at 14.220 bb – down 400 mb from last year’s record high.  Ending stocks are projected to be 2.215 bb (15.58% S/U) – down from 2.320 bb (15.87% S/U) in “current” MY 2016/17.  United States’ corn prices are projected by the USDA to average $3.50 /bu – up from a midpoint estimate of $3.40 /bu from “current” MY 2016/17 – but within the range of $3.25-$3.55 /bu for this marketing year. This scenario is given a 55% likelihood of occurring by KSU Extension Ag Economist D. O’Brien.

Alternative KSU Forecasts for “Next Crop” MY 2017/18

Three alternative KSU-Scenarios for U.S. corn supply-demand and prices are presented for “next crop” MY 2017/18.  Each forecast scenario presents the likelihood of lower U.S. corn acreage, yields and production than projected by the USDA in the February 23-24, 2017 Agricultural Outlook Forum for “next crop” MY 2017/18.

  • KSU “Next Crop” MY 2017/18 Scenario #1) “167.3 bu/ac – 13.556 bb” Scenario (25% probability) assumes: 88.500 ma planted, 81.031 ma harvested, 167.3 bu/ac trend yield, 13.556 bb production, 15.926 bb total supplies, 14.185 bb total use, 1.741 bb ending stocks, 12.27% S/U, & $3.85 /bu U.S. corn average price for “next crop” MY 2017/18;
  • KSU “Next Crop” MY 2017/18 Scenario #2) “165.0 bu/ac – 13.370 bb” Scenario (15% probability) assumes: 88.500 ma planted, 81.031 ma harvested, 165.0 bu/ac yield, 13.370 bb production, 15.740 bb total supplies, 14.080 bb total use, 1.660 bb ending stocks, 11.21% S/U, & $4.05 /bu U.S. corn average price for “next crop” MY 2017/18;
  • KSU “Next Crop” MY 2017/18 Scenario #3) “150.0 bu/ac – 12.155 bb” Scenario (5% probability) assumes: 88.500 ma planted, 81.031 ma harvested, 150.0 bu/ac yield, 12.155 bb production, 14.525 bb total supplies, 13.460 bb total use, 1.065 bb ending stocks, 7.91% S/U, & $4.75 /bu U.S. corn average price for “next crop” MY 2017/18;

World Corn Supply-Demand

Record high World corn production of 1,053.8 million metric tons (mmt) is projected for “current” MY 2016/17, up 9.4% from 963.3 mmt in MY 2015/16, and up 3.7% from 1,016.0 mmt in MY 2014/15.  Record high World corn total supplies of 1,265.6 mmt are projected for “current” MY 2016/17, up from 1,173.1 mmt in MY 2015/16, and from 1,190.8 mmt in MY 2014/15.

World corn exports of 154.4 mmt are projected for “current” MY 2016/17, up 28.7% from 120.0 mmt in MY 2015/16, and up 8.6% from 142.2 mmt in MY 2014/15.  Projected record high World corn ending stocks of 223.0 mmt (21.4% S/U) in “new crop” MY 2016/17 are up from 211.8 mmt (22.0% S/U) in MY 2015/16, and from 209.8 mmt (21.4% S/U) in MY 2014/15.

  • Although World corn ending stocks are projected to be a record high in “current” MY 2016/17 at 223.0 mmt, World corn percent ending stocks-to-use are forecast to actually decline marginally to 21.4%.  Strong World demand for corn at low prices is expected to continue – especially in the United States, Argentina, Mexico, Southeast Asia, China, Ukraine, and other Former Soviet Union countries (less Ukraine).   An ongoing, strong demand base for corn could help cause sharply increased corn market volatility in the summer of 2017 IF any serious threats emerge to the 2017 U.S. corn crop.

KSU Weekly Grain Market Analysis: U.S. Exports, Ethanol Trends and Kansas Wheat Freeze Damage Worries

Grain market summary notes, charts and comments supporting the Grain Market Update presented in the KSU Agriculture Today radio program to be played on Friday, April 28, 2017 are available on the Kansas State University www.AgManager.info website at the following KSU web address:

http://www.agmanager.info/sites/default/files/pdf/KSRN_GrainOutlook_04-28-17.pdf

The recorded radio program was aired at 10:03 a.m. central time, Friday, April 28, 2017 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the April 28th recording is available at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

U.S. Ethanol and Biodiesel Market-Profitability Graphics through 4/25/2017 (via KSU AgManager)

Following are some graphics on price and profitability trends in the U.S. ethanol and biodiesel industries, which will soon be available on the KSU AgManager website: http://www.agmanager.info/    The full presentation titled “U.S. Ethanol & Biodiesel Market Situation” made for WILL (Illinois Public Radio) on Tuesday, April 25, 2017 and will be located at the KSU AgManager.info website – at the following web address:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter/us-ethanol-and-biodiesel-market-situation

 

 

 

 

 

 

 

 

 

 

 

 

KSU Wheat Market Outlook in April 2017 – “Decent” U.S. HRW Wheat Exports and Possible Market Scenarios for MY 2017/18

An analysis of U.S. and World wheat supply-demand factors and 2016-2017 price prospects following the USDA’s April 11th 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:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter

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Summary

Since the USDA’s April 11th World Agricultural Supply and Demand Estimates (WASDE) report, U.S. and World wheat futures market prices first traded higher then turned lower.  CME MAY 2017 Kansas HRW Wheat futures gained $0.04 ¼ /bu to close at $4.29 ¾ on 4/11/2017 – the day of the report – but after trading higher for two days have since declined through Wednesday, April 19th – closing down to $4.16 ¾ that same day.

World Wheat Supply-Demand

For the “current crop” 2016/17 marketing year (MY), the USDA projected the following. First, World wheat total supplies of 993.1 million metric tons (mmt) and total use of 740.8 mmt – both at record high levels.  Second, that World wheat exports are continuing to trend higher to 180.7 mmt in the “current” marketing year – up from 172.8 mmt last year, and up from 164.45 mmt two years ago.  Third, World wheat ending stocks at a record high 252.3 mmt up from 241.7 mmt last year, and 217.6 mmt two years ago.  And fourth, World wheat percent ending stocks-to-use (S/U) of 34.05% – up from 34.0% last year, and from 30.85% two years ago –the highest since MY 2005/06.

For a perspective on how historically large World total wheat stocks and World wheat percent stocks-to-use now are, in MY 2007/08 the 34-year low in World wheat ending stocks of 128.1 mmt and at least a 57-year low in percent ending stocks-to-use of 20.9% stocks/use both occurred – the last major World wheat “short crop” marketing year.  The situation in MY 2007/08 compares to projections of 252.3 mmt ending stocks and 34.05% ending stocks-to-use projected for “current” MY 2016/17.  The present “large crop-over supply” situation in World and U.S. wheat markets have a prevailing negative influence on U.S. and World wheat prices.

However, the broader “large crop-over supply-low price” situation in the World wheat market may be “obscuring” at least a couple of other important market issues.  First, while the quantity of wheat available in the World is plentiful, the available supply of high protein milling wheat is less so.  This factor helps exports of both U.S. Hard Red Spring (HRS) wheat (higher protein – good quality) relative to World wheat export competitors.  Second, while the aggregate supply of wheat in World markets has grown, the supply of wheat in the “World Less China” is projected to have actually “contracted” or “diminished” in “current crop” MY 2016/17 compared to a year ago – down to the tightest supply-balances only marginally larger than existed in MY 2013/14.  If this “China factor” eventually leads to noticeably tighter available global supplies of exportable wheat to occur in coming months, it could have a positive impact U.S. wheat market prices in late-Spring 2017.

Even so, given the broader World wheat market’s current focus – it is likely that significant World wheat production problems and/or trade disruptions would need to occur in year 2017 in order to have wheat prices recover significantly by spring-summer 2017.  Ongoing strength in the U.S. dollar exchange rate is a serious negative factor limiting the competitive affordability of U.S. wheat exports.  These factors have resulted in higher U.S. wheat ending stocks and % ending stocks-to-use, and have caused U.S. and Kansas wheat cash prices to fall sharply – down near to and below the marketing loan rate in many Kansas locations.

USDA U.S. Wheat Supply-Demand Forecast for “Next Crop” MY 2017/18

On February 23-24, 2017 at the Agricultural Outlook Forum in Arlington, Virginia, the USDA released their grain market supply-demand and price projections for “next crop” MY 2017/18.  With additional acreage and usage information the March 31st USDA Prospective Plantings and Grain Stocks reports, and the April 11th USDA World Agricultural Supply and Demand Estimates (WASDE) report, the following projections for “next crop” MY 2017/18 are figured.

For “next crop” MY 2017/18, 2017 U.S. wheat plantings are projected to be 46.059 million acres (ma) – down from 50.154 ma in 2015.  Harvested acres for 2016 are forecast to be 39.050 ma – down from 43.890 ma a year ago.  Trendline 2017 wheat yields for 2017 are projected at 47.1 bu/a, down from the 2016 record of 52.6 bu/ac, while the adjusted 2017 U.S. wheat production forecast is 1.839 billion bushels (bb), down from 2.310 bb in 2015.  Projected “next crop” MY 2017/18 total supplies are 3.118 bb (down from 3.395 bb in “current” MY 2016/17), with total use of 2.191 bb (down from 2.236 bb in “current” MY 2016/17).

Given these numbers, the adjusted USDA projection of “next crop” MY 2017/18 ending stocks equals 927 million bushels (mb) (vs 1.159 bb a year ago), with percent ending stocks-to-use of 42.3% S/U (vs 51.8% last year and 50.0% the previous year).  United States’ wheat prices are projected to average approximately $4.25 /bu – up from $3.85 in “current” MY 2016/17, but down from $4.89 /bu in MY 2015/16, and $5.99 /bu in MY 2014/15.   It is assumed by Kansas State University that these adjusted USDA projections for “next crop” MY 2016/17 have a 50% probability of occurring.

Three Alternative KSU U.S. Wheat Supply-Demand Forecasts for “Next Crop” MY 2017/18

As an alternative to the USDA’s projection, three potential KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “next crop” MY 2017/18.

A. KSU Scenario 1) “Trend Yield” Scenario (25% probability) assumes for “next crop” MY 2017/18 that the following occurs.  It is assumed that there will be 46.059 ma planted, 39.334 ma harvested, 47.0 bu/ac trend yield, 1.849 bb production, 3.128 bb total supplies, 975 mb exports, 190 mb feed & residual use, 2.191 bb total use, 937 mb ending stocks, 42.8% S/U, & $4.20 /bu U.S. wheat average price.

B. KSU Scenario 2) “Higher U.S. Wheat Exports” Scenario (15% probability) assumes for “next crop” MY 2017/18 the following.  The following is forecast for “next crop” MY 2017/18, i.e., 46.059 ma planted, 39.334 ma harvested, 47.0 bu/ac trend yield, 1.849 bb production, 3.128 bb total supplies, 1.150 bb exports, 190 mb feed & residual use, 2.326 bb total use, 802 mb ending stocks, 24.10% S/U, & $4.90 /bu U.S. wheat average price;

C. KSU Scenario 3) “Short U.S. Wheat Crop” Scenario (10% probability) assumes for “next crop” MY 2017/18 that the following happens.  This scenario assumes 46.059 ma planted, 37.124 ma harvested, 40.0 bu/ac low yield, 1.485 bb production, 2.769 bb total supplies, 975 mb exports, 175 mb feed & residual use, 2.175 bb total use, 594 mb ending stocks, 27.31% S/U, & $5.50 /bu U.S. wheat average price.