KSU Weekly Grain Market Analysis: Positive Corn, Sorghum and Wheat Basis Trends in Kansas

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 26, 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_05-26-17.pdf

The recorded radio program will be aired at 10:03 a.m. central time, Friday, May 26, 2017 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the May 26th 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…

KSU Wheat Market Outlook in Mid-May 2017 – “Next Crop” MY 2017/18 U.S., World, and “World Less China” Market Scenarios

This report provides an analysis of U.S. and World wheat supply-demand factors and “next crop” 2017/18 marketing year price prospects following the USDA’s May 10th Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports.  This article will be available in full on the KSU AgManager website on Monday, May 22, 2017 (http://www.agmanager.info/).

Following is a summary – with the full analysis-article for Wheat Market Outlook in “Next Crop” MY 2017/18 to be found at this web location:

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

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Summary

Overview

Since the USDA’s May 10th World Agricultural Supply and Demand Estimates (WASDE) report, U.S. and World wheat futures market prices first traded lower then turned higher again.  CME JULY 2017 Kansas HRW Wheat futures closed at $4.39 ¼ on 5/10/2017 – the day of the report.  But after trading lower to close at $4.21 on May 16th, JULY 2017 Kansas HRW Wheat moved higher again to close at $4.38 on Friday, May 19th.

Projected World Wheat Supply-Demand in “Next Crop” MY 2017/18

For the “next crop” 2017/18 marketing year (MY) beginning on June 1st, the USDA projected the following.

First, that World wheat total supplies would be 993.2 million metric tons (mmt) with total use of 734.9 mmt – both marginally lower than the record high levels of “current” MY 2016/17.

Second, that World wheat exports will also trend lower to 178.35 mmt in the “next crop” 2017/18 marketing year – down from a record high of 179.7 mmt last year, but up from 172.85 mmt two years ago.

Third, that World wheat ending stocks would be a record high 258.9 mmt in “next crop” MY 2017/18 – up from 255.35 mmt last year, and from 242.4 mmt two years ago.

And fourth, that World wheat percent ending stocks-to-use (S/U) would be 35.1% – up from 34.5% last year, and from 34.0% two years ago – up to the highest level of World wheat supply-demand balances since 36.2% in MY 1999/00 and 36.5% in MY 1998/99.

Comparisons to “Short Crop” MY 2012/13

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 128.2 mmt and at least a 57-year low in percent ending stocks-to-use of 20.9% stocks/use both occurred – the last significant World wheat “short crop” marketing year.  The “tight supply-demand” situation in MY 2007/08 compares to projections of 258.3 mmt ending stocks and 35.1% ending stocks-to-use projected for “next crop” MY 2017/18.  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.

The Existing “Large Crop – Over Supply – Low Price” Market Condition

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 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 “next crop” MY 2017/18. “World Less China” wheat percent stocks-to-use have declined to the tightest level since at least MY 2008/09 when average U.S. wheat cash prices averaged $5.70 /bu.  If this “China supply isolation factor” eventually leads to noticeably tighter global supplies of available exportable wheat occurring in coming months, it would likely have a positive impact U.S. wheat market prices in “next crop” MY 2017/18.

The Likely Direction of the World Wheat Market Unless Major S-D Changes Occur

However, unless there is a change in the broader, overriding focus of the World wheat market away from aggregate global supplies to available “World Less China supplies – 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 in later 2017.  Also, ongoing strength in the U.S. dollar exchange rate continues to be a negative factor limiting the competitive affordability of U.S. wheat exports in World markets.  These factors together 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 still be only $0.30 /bu above the marketing loan rate in many Kansas locations in mid-May 2017 (after earlier having to fallen below loan rates in Fall 2016).

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

The USDA released their grain market supply-demand and price projections for “next crop” MY 2017/18 in the May 10th World Agricultural Supply and Demand Estimates (WASDE) report.  United States’ wheat plantings are projected to be 46.059 million acres (ma) – down from 50.154 ma in “current” MY 2016/17.  Harvested acres are forecast to be 38.500 ma (83.59% harvested-to-planted) – down from 43.890 ma a year ago.  The 2017 U.S. average wheat yield is projected at 47.2 bu/ac, down from the 2016 record of 52.6 bu/acre.

Wheat production in the U.S. in 2017 is forecast to be 1.820 billion bushels (bb), down from 2.310 bb in 2015.  Projected “next crop” MY 2017/18 total supplies are 3.105 bb (down from 3.400 bb in “current” MY 2016/17), with total use of 2.191 bb (down from 2.241 bb in “current” MY 2016/17).

The USDA projected “next crop” MY 2017/18 ending stocks to be 914 million bushels (mb) (vs 1.159 bb a year ago), with percent ending stocks-to-use of 41.7% S/U (vs 51.7% last year and 50.0% the previous year).  United States’ wheat prices are projected to average $4.25 /bu – up from $3.90 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 S/D Forecast 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.

  1. 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, 82.50% harvested-to-planted, 37.999 ma harvested, 47.0 bu/ac trend yield, 1.786 bb production, 3.070 bb total supplies, 1.000 bb exports, 180 mb feed & residual use, 2.200 bb total use, 870 mb ending stocks, 39.6% S/U, & $4.45 /bu U.S. wheat average price.
  2. KSU Scenario 2) “Higher U.S. Wheat Exports” Scenario (15% probability) assumes the following for “next crop” MY 2017/18.  Planted acres of 46.059 ma are associated with 39.334 ma harvested (82.50% harvested-to-planted), 47.0 bu/ac trend yield, 1.786 bb production, 3.070 bb total supplies, 1.150 bb exports, 180 mb feed & residual use, 2.350 bb total use, 720 mb ending stocks, 30.6% S/U, & $5.10 /bu U.S. wheat average price;
  3. KSU Scenario 3) “Short U.S. Wheat Crop” Scenario (10% probability) assumes the following for “next crop” MY 2017/18.  Planted acres of 46.059 ma, 80.60% harvested-to-planted, 37.124 ma harvested, 40.0 bu/ac low yield, 1.485 bb production, 2.769 bb total supplies, 950 mb exports, 125 mb feed & residual use, 2.095 bb total use, 674 mb ending stocks, 32.17% S/U, & $5.00 /bu U.S. wheat average price.

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KSU Corn Market Outlook in Mid-May 2017: Considering Acreage, Yield and Production Scenarios

This article provides an analysis of U.S. and World corn supply-demand factors and price prospects for the “next crop” 2016/17 marketing year following the USDA’s May 10, 2017 USDA Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports.

Following is a summary of the article on “Corn Market Outlook in Mid-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

 

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Summary

Overview

Since the USDA’s May 10th World Agricultural Supply and Demand Estimates (WASDE) report, JULY 2017 CME corn futures have been moderately volatile – moving both higher and lower within the range of $3.65 ¼ to $3.74.  “Current” MY 2016/17 U.S. corn prices have found some support due to 2017 production uncertainties (i.e., wet soils impacting corn planting & establishment in some regions and varying weather forecasts for summer 2017) and strong U.S. corn use in ethanol production, wet corn milling, exports and to a moderate degree in livestock feeding.

In addition, in the March 31st Prospective Plantings report the USDA forecast fewer U.S. corn planted acres in 2017.  If in 2017 there is a return to trend line U.S. corn yields near 167-168 bu/acre, then 170 bu/acre in 2017, then 2017 U.S. corn production could be in the range of 13.500 to 13.750 billion bushels (bb) instead of the USDA projection of 14.065 bb or the record high of 15.148 bb in 2016.

Forecasts by the USDA and other market analysts that ending stocks of U.S. corn will stay above 2 bb in “next crop” MY 2017/18, coupled with ending stocks-to-use above 14.5%-15.0% 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 – mid-May were to continue until late-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.

Kansas Cash Corn Bids & Basis as of May 17, 2017

Cash corn bids at major grain elevators ranged from $3.07 ($0.65 under JULY futures) to $3.62 ($0.10 under) in Western Kansas and $2.98 ($0.73 under) to $3.31 ½ ($0.40 under) in Central Kansas on Wednesday, May 17th.  This represents a marked increase since October-December 2016 when corn price bids statewide 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 price bids in east central and northeast Kansas – near river terminal locations – were near $3.48 ½ – $3.51 ½ on May 17th, up from the range of $3.26-$3.28 per bushel on 12/23/2016.  Cash corn bids at Kansas ethanol plants on May 17th ranged from $3.47 ¾ ($0.20 under) to $4.02 ¾ ($0.35 over) – indicating continuing strength in ethanol demand for corn 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 that Could Affect the Corn Market in 2017

  • 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 and some into summer 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.
  • And 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 & Price Forecast for “Next Crop” MY 2017/18

Early USDA projections are for 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 of 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 16.410 bb – down 530 mb from last year’s record high.  Total use is forecast at 14.300 bb – down 345 mb from last year’s record high.  Ending stocks are projected to be 2.110 bb (14.76% S/U) – down from 2.295 bb (15.67% S/U) in “current” MY 2016/17.  United States’ corn prices are projected to average $3.40 /bu (range of $3.00-$3.80).  This equals the midpoint estimate of $3.40 /bu from “current” MY 2016/17. This scenario is given a 45% likelihood of occurring by KSU Extension Ag Economist D. O’Brien.

Alternative KSU Supply-Demand & Price Forecast 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 May 10, 2017 WASDE report 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, 15.901 bb total supplies, 14.255 bb total use, 1.646 bb ending stocks, 11.55% S/U, & $3.95 /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, 15.715 bb total supplies, 14.155 bb total use, 1.560 bb ending stocks, 11.02% S/U, & $4.10 /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, 80.535 ma harvested, 150.0 bu/ac yield, 12.080 bb production, 14.375 bb total supplies, 13.460 bb total use, 915 million bushels (mb) ending stocks, 6.80% S/U, & $6.00 /bu U.S. corn average price for “next crop” MY 2017/18;

World Corn Supply-Demand Trends

World corn production of 1,033.7 million metric tons (mmt) is projected for “next crop” MY 2017/18, down 3.0% from the record high of 1,065.1 mmt in “current” MY 2016/17, but still up 6.8% from 968.1 mmt in MY 2015/16.  Near record World corn total supplies of 1,257.6 mmt are projected for “next crop” MY 2017/18, down marginally from the record high of 1,278.1 mmt in “current” MY 2016/17, but up from 1,177.5 mmt in MY 2015/16.

World corn exports of a near record 151.9 mmt are projected for “next crop” MY 2017/18, down 4.2% from the record high of 158.6 mmt in MY 2015/16, and up 26.6% from 119.95 mmt in MY 2015/16.  Projected World corn ending stocks of 195.3 mmt (18.4% S/U) in “next crop” MY 2017/18 are down from the record high 223.9 mmt (21.3% S/U) in “current” MY 2016/17, and from 212.4 mmt (22.0% S/U) in MY 2015/16.

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: Alternative Scenarios for “Next Crop” 2017/18 Corn and Wheat

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 12, 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_05-12-17.pdf

The recorded radio program was aired at 10:03 a.m. central time, Friday, May 12, 2017 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the May 12th recording will be available at the KSU Agriculture Today website after the recording.

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

“Deep Numbers” Analysis of the May 10, 2017 USDA WASDE Report (D. O’Brien KSU)

A “deep numbers” analysis of the results of the May 10, 2017 USDA World Agricultural Supply and Demand Estimates (WASDE) report is available on the Agmanager.info website from Kansas State University. The May WASDE report considered “next crop” 2017/18 marketing year, “current” MY 2016/17, and MY 2015/16 supply-demand and price prospects for U.S. crops, and supply-demand prospects for global and country-by-country analysis.

Results are available at the following web address:

http://www.agmanager.info/wasde-quick-analysis-spreadsheet

This “deep numbers” analysis considers how the May 10th USDA WASDE and other National Agricultural Statistics Service (NASS) numbers compare to pre-report trade expectations, last month’s report estimates, and previous years.

World Wheat, Corn, Coarse Grain and Soybean supply demand numbers are also considered in an extended look at production, exports, imports, food-industrial and seed use (for corn and coarse grains), food use (for wheat), crush (soybeans), feed and residual use (corn, coarse grains and wheat), ending stocks, and % ending stocks to use.

Selections from this “deep numbers” WASDE report analysis are as follows:

 

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.