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

***

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.

******

 

Key Supply-Demand Factors “Driving” Grain Markets (KSU Extension Ag Economics)

The following presentation on “Key Supply-Demand Factors ‘Driving” Grain Markets” was given on Tuesday, March 14, 2017 to the AgEcon 605 class on “Price Analysis and Forecasting” as a guest lecture.  The class is regularly taught by Dr. Richard Llewelyn of the Kansas State University Department of Agricultural Economics.

This presentation focuses on the key factors that have been “driving” or influencing grain markets over the last 15-25 years.   The full presentation will be available on the KSU Agricultural Economics website at the following web location:

http://www.agmanager.info/sites/default/files/pdf/OBrien_GrainMarketDrivers_03-15-17.pdf

 

 

 

KSU Wheat Market Outlook in December 2016: USDA and KSU Price Forecasts for “Next Crop” MY 2017/18

An analysis of U.S. and World wheat supply-demand factors and 2017 price prospects following the USDA’s December 9th World Agricultural Supply Demand Estimates (WASDE) report, and the market actions that have followed those reports will be available on the KSU AgManager website in the next few days (http://www.agmanager.info/default.asp).

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

***

Summary

Wheat Market Prices

Since the USDA’s December 9th World Agricultural Supply and Demand Estimates (WASDE) report, U.S. and World wheat futures market prices have traded higher – with CME MARCH 2017 Kansas HRW Wheat futures gaining $0.08 ¾ /bu to close at $4.13 ½ on 12/9/2016 – the day of the report – and trading as high as $4.20 ¾ per bushel through Wednesday, December 28th before closing down to $4.09 ½ that same day.

World Wheat Supply-Demand

For the “current crop” 2016/17 marketing year (MY), the USDA projected: 1) World wheat total supplies of 991.9 million metric tons (mmt) and total use of 739.8 mmt – both at record high levels, 2) that World wheat exports are continuing to trend higher to 176.8 mmt in the “current” marketing year – up from 172.5 mmt last year, and up from 164.4 mmt two years ago, 3) World wheat ending stocks at a record high 252.1 mmt up from 240.65 mmt last year, and 217.2 mmt two years ago, and 4) World wheat percent ending stocks-to-use (S/U) of 34.1% – up from 33.8% last year, and from 30.8% two years ago – up to the highest level 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 20.75% stocks/use both occurred – the last major World wheat “short crop” marketing year.  The situation in MY 2007/08 compares to projections of 252.1 mmt ending stocks and 34.1% ending stocks-to-use projected for “current” MY 2016/17.  The “large crop-over supply” situation that now exists in World and U.S. wheat markets continues to have a strong prevailing negative influence on U.S. and World wheat prices.

Factors that Could Change the “Large Crop – Over-Supply” Wheat Market Situation

However, the broader large crop-over supply-low price” situation in the World wheat market may be “hiding” 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 may eventually help exports of both U.S. Hard Red Spring (HRS) wheat (higher protein – good quality) and U.S. Hard Red Winter (HRW) wheat (moderate protein – good quality) relative to World wheat export competitors.  As evidence of this, exports of U.S. HRW wheat have been occurring at the pace needed to meet USDA projections – helped by both low purchase prices and acceptable protein and quality.  This raises the outside possibility of improved U.S. HRW prices in coming months.  Second, while the supply of wheat in World markets overall 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 situation since 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 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 that is 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 to and below the marketing loan rate in most of Kansas in fall / early winter 2016.

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

On December 1, 2016 the USDA released their preliminary Long Term Agricultural Projections to 2026, in which they projected 2017 U.S. wheat plantings of 48.500 million acres (ma) – down from 50.154 ma in 2015.  The USDA also forecast 2016 harvested acres of 41.100 ma which would be 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 2017 U.S. wheat production is forecast to be 1.936 billion bushels (bb), down from 2.310 bb in 2015.  Projected “next crop” MY 2017/18 total supplies are 3.199 bb (down from 3.410 bb in “current” MY 2016/17), with total use of 2.206 bb (down from 2.267 bb in “current” MY 2016/17).

Given these numbers, the USDA projected “next crop” MY 2017/18 ending stocks of 933 million bushels (mb) (vs 1.143 bb a year ago), with percent ending stocks-to-use of 45.0% S/U (vs 50.4% last year and 50.0% the previous year).  United States wheat average prices are projected to average $4.00 /bu – up from $3.70 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 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.  These scenarios assume lower 2017 U.S. planted (47.624 ma) and harvested (38.385 ma) wheat acres than the USDA – due to larger than normal amounts of “graze out” and “crop switching” in 2017.

KSU Scenario 1) “Lower Acres, Trend Yield” Scenario (30% probability) assumes for “next crop” MY 2017/18: 47.624 ma planted, 38.385 ma harvested, 47.0 bu/ac trend yield, 1.804 bb production, 3.067 bb total supplies, 960 mb exports, 200 mb feed & residual use, 2.191 bb total use, 876 mb ending stocks, 39.98% S/U, & $4.00-$4.50 /bu U.S. wheat average price;

KSU Scenario 2) “Lower Acres, Trend Yield, +20% Exports” Scenario (10% probability) assumes for “next crop” MY 2017/18: 47.624 ma planted, 38.385 ma harvested, 47.0 bu/ac trend yield, 1.804 bb production, 3.067 bb total supplies, 1.152 bb exports***, 200 mb feed & residual use, 2.383 bb total use, 684 mb ending stocks, 24.10% S/U, & $5.25-$5.75 /bu U.S. wheat average price;

KSU Scenario 3) “Lower Acres, Short Crop Yield” Scenario (10% probability) assumes for “next crop” MY 2017/18: 47.624 ma planted, 38.385 ma harvested, 43.6 bu/ac low yield***, 1.674 bb production, 2.937 bb total supplies, 925 mb exports, 200 mb feed & residual use, 2.156 bb total use, 781 mb ending stocks, 36.22% S/U, & $4.40-$4.90 /bu U.S. wheat average price.

slide1 slide2 slide3 slide4 slide5 slide6 slide7 slide8 slide9 slide10 slide11 slide12 slide13 slide14 slide15 slide16 slide17

Save

Non-Convergence of CME HRW Wheat Futures and the DEC 2015, JULY 2016, and SEPT 2017 Contracts

An article on “Non-Convergence of CME HRW Wheat Futures for the DEC 2015, JULY 2016, and SEPT 2017 Contracts” is available on the KSU AgManager website (www.AgManager.info) at the following web address:

http://www.agmanager.info/non-convergence-cme-kansas-hrw-wheat-futures-dec-2015-july-2016-and-sept-2016-contracts

Following is a summary of the article, with the full text, figures, and data table on the AgManager website:

*****

Summary

Since the delivery period for the SEPT 2015 Chicago Mercantile Exchange (CME) Kansas Hard Red Winter (HRW) wheat futures contract, basis bids at designated delivery elevator locations during futures contract delivery periods have been markedly wider than the futures-cash price differentials at delivery designated in the CME Kansas HRW wheat futures contract specifications.  This market condition seems to be due to a combination of excessive supplies of wheat and to non-convergence of futures with cash wheat prices during delivery periods at designated delivery elevators.

During the late-August delivery period for the SEPT 2016 CME Kansas HRW wheat futures contract, truck bids for ordinary wheat in Kansas City, MO – where a number of the designated delivery elevators for the CME Kansas HRW wheat futures contracts are located – were $0.55-$0.58 per bushel under futures.  At other CME Kansas HRW wheat futures contract delivery elevator locations in Wichita, Hutchinson, and Salina, Kansas, wheat basis levels (i.e., the difference between futures and local cash prices) of $0.80-$0.85 per bushel under futures were recorded.  These basis levels are markedly wider than the location-based price differentials formally designated to occur during delivery according to CME Kansas HRW wheat futures contract specifications, i.e., $0.12 per bushel under at Salina/Abilene delivery elevators, $0.09 per bushel under at Hutchinson, $0.06 under at Wichita, and no discount or “par” at Kansas City, MO truck bid locations.

While this lack of convergence at designated delivery elevator locations between cash and futures prices for HRW wheat has been due partly to a combination of wheat market supply-demand factors, it seems that issues related to the design of the futures contract itself are also contributing significantly.  This is particularly true in regards to grain delivered by short futures position holders on CME Kansas HRW wheat futures contracts.

Potential remedies to non-convergence in the CME Kansas HRW wheat futures contract include instituting a VSR on this contract as well as the Chicago wheat futures contract, or to raise the fixed storage rate paid on warehouse receipts in the CME Kansas HRW wheat futures contract high enough to motivate “load out” cash sales instead of storage on the part of long position holders.

Causes of Current Wide Wheat Basis Levels in Kansas

Wide wheat basis levels that have existed in Kansas wheat markets since July 2016 are primarily the result of a) a large 2016 Kansas wheat crop, b) only a moderate pace of usage of U.S. hard red winter wheat in terms of exports, milling, and wheat feeding, and c) large inventories of wheat relative to available storage space at grain elevators in the state. And with large Kansas 2016 fall crop harvests occurring following the large 2016 wheat crop – the Kansas grain elevator system is expected to be filled beyond its constructed storage capacity, with the excess being placed temporarily in outdoor piles of grain (much of it to be covered with plastic, etc.).

While the supply-demand situation for wheat and other crops in Kansas is the primary factor leading to lower cash grain prices and wide basis levels, the lack of convergence between the Chicago Mercantile Exchange (CME) Kansas Hard Red Winter (HRW) wheat futures contract and cash prices at designated delivery elevator locations in Kansas during the delivery periods for the JULY 2016 and SEPTEMBER 2016 contracts has also been a contributing factor.

Non-convergence of HRW wheat futures and cash prices in Kansas has been an ongoing, periodic problem since at least early 2009.  Table 1 and Figure 1 show wheat cash prices for truck bids and basis levels for Ordinary HRW wheat at Kansas City, Missouri for the MARCH 2009 through SEPTEMBER 2016 CME Kansas HRW wheat futures contracts.  Kansas City, Missouri one of the – if not the primary – designated delivery elevator location for the CME Kansas HRW wheat futures contract.  Table 1 and Figure 2 show basis levels during these same CME HRW wheat futures contract delivery periods in Kansas City, Missouri as well at other designated delivery locations in Wichita, Hutchinson, and Salina-Abilene in Kansas. The cash prices and basis levels for Wichita, Hutchinson, and Salina-Abilene represent the reported upper ends of the cash price trading ranges for these locations from USDA Agricultural Marketing Service (AMS) daily reports for central Kansas grain markets.

Wheat Basis During Delivery Periods for the DEC 2015, JULY 2016 and SEPT 2016 CME Kansas HRW Wheat Futures Contracts

During calendar years 2009 through 2014, there were periods of extremely wide basis levels for the Kansas HRW wheat futures contract during delivery periods at Kansas City, Missouri delivery locations.  This was especially true during delivery for the DEC 2009 through MAY 2011 Kansas HRW wheat contracts. During this time frame, delivery period basis levels at Kansas City, Missouri delivery locations widened to $0.50 to $0.90 per bushel under associated expiring futures contracts.

This widening of wheat basis levels was primarily responsible for motivating changes that were made to the Kansas HRW wheat futures contract by the Kansas City Board of Trade in year 2011 – consisting of higher fixed storage rates on delivered warehouse receipts and tighter wheat protein and quality standards are delivered wheat.

Following is a record of the wheat basis levels that occurred at designated delivery elevators for the CME Kansas HRW wheat futures contract from the DEC 2015 futures contract forward through the SEPT 2016 futures contract.

  1. DECEMBER 2015 CME Kansas HRW Wheat Futures

Non-convergence of HRW wheat futures and cash prices during delivery periods has occurred consistently during the 2015/16 and 2016/17 marketing years.  Following what is more likely to be “convergence-like” performance for the JULY 2015 and SEPTEMBER 2015 CME Kansas wheat futures contracts, the DEC 2015 contract appeared to not converge with cash prices during the contract delivery period.

During the November 19-24, 2015 time-frame, truck bids for cash wheat in Kansas City, Missouri ranged from $4.17 to $4.25 per bushel.  Wheat basis levels ranged from $0.38-$0.40 under nearby DEC 2015 futures for November 19-20, and under MARCH 2016 futures for November 23-24 (Table 1, Figures 1 & 2).  During this same period, wheat basis bids at designated delivery locations in Salina ranged from $0.25-$0.30 under, compared to $0.20-$0.25 under in Hutchinson, and $0.25-$0.30 in Wichita.

These cash basis levels for the DEC 2015 Kansas HRW wheat contract were wider than the location-based price differentials formally designated to occur in the CME Kansas HRW wheat futures contract specifications, i.e., $0.12 per bushel under at Salina/Abilene delivery elevators, $0.09 per bushel under at Hutchinson, $0.06 under at Wichita, and no discount or “par” at Kansas City, Missouri truck bid locations.

  1. MARCH 2016 CME Kansas HRW Wheat Futures

After seeming non-convergence during delivery for the DEC 2015 CME Kansas HRW wheat futures contract, the basis levels during delivery for MARCH 2016 futures for the 2/23-2/26/2016 period were consistently $0.18 under in Kansas City, Missouri, and $0.35 under in Salina, $0.30 under in Hutchinson, and primarily $0.32 under in Wichita (with a late one day “jump” to $0.55 under on 2/26/2016) (Table 1, Figures 1 & 2).

As for the DEC 2015 CME Kansas HRW wheat futures contract, these cash basis levels for the MARCH Kansas HRW wheat contract are wider than the location-based price differentials formally designated to occur according to CME Kansas HRW wheat futures contract specifications, i.e., $0.12 per bushel under at Salina/Abilene delivery elevators, $0.09 per bushel under at Hutchinson, $0.06 under at Wichita, and no discount or “par” at Kansas City, Missouri truck bid locations.

  1. MAY 2016 CME Kansas HRW Wheat Futures

Basis levels during delivery for MARCH 2016 futures for the 4/26-4/29/2016 period were consistently $0.17 under in Kansas City, Missouri, and $0.45 under in Salina, $0.40 under in Hutchinson, and $0.35-$0.50 under in Wichita (i.e., $0.50 under on 4/26-27, and $0.35 under on 4/28-29) (Table 1, Figures 1 & 2).

As for the DEC 2015 and MARCH 2016 CME Kansas HRW wheat futures contracts, these cash basis levels for the MAY Kansas HRW wheat contract are wider than the location-based price differentials formally designated to occur according to CME Kansas HRW wheat futures contract specifications, i.e., $0.12 per bushel under at Salina/Abilene delivery elevators, $0.09 per bushel under at Hutchinson, $0.06 under at Wichita, and no discount or “par” at Kansas City, Missouri truck bid locations.

  1. JULY 2016 CME Kansas HRW Wheat Futures

During the June 27-30, 2016 period truck bids for cash wheat in Kansas City, Missouri ranged from $3.74 to $3.88 per bushel.  Basis levels were $0.25 under nearby JULY 2016 futures for the June 27-30 period (Table 1, Figures 1 & 2).  During this same period, wheat basis bids at designated delivery locations in Salina were $0.65 under, compared to $0.55 under in Hutchinson, and $0.65 in Wichita.

As has consistently occurred since the DEC 2015 CME Kansas HRW wheat futures contract delivery period, these cash basis levels for the JULY 2016 Kansas HRW wheat contract are markedly wider than the location-based price differentials formally designated to occur in the CME Kansas HRW wheat futures contract specifications, i.e., $0.12 per bushel under at Salina/Abilene delivery elevators, $0.09 per bushel under at Hutchinson, $0.06 under at Wichita, and no discount or “par” at Kansas City, Missouri truck bid locations.

  1. SEPTEMBER 2016 CME Kansas HRW Wheat Futures

Truck bids for cash wheat in Kansas City, Missouri ranged from $3.10 to $3.51 per bushel for the August 25-30, 2016 period.  Basis levels were $0.55 under nearby SEPT 2016 futures for August 25-26, and $0.58 under DEC 2016 futures for August 29-30 (Table 1, Figures 1 & 2).  During this same period, wheat basis bids at designated delivery locations in Salina, Kansas were $0.85 under, compared to $0.80 under in Hutchinson, and $0.85 in Wichita.

In what has developed to be a consistent pattern since late 2015, these cash basis levels for the SEPT 2016 Kansas HRW wheat contract are markedly wider than the location-based price differentials formally designated to occur according to CME Kansas HRW wheat futures contract specifications, i.e., $0.12 per bushel under at Salina/Abilene delivery elevators, $0.09 per bushel under at Hutchinson, $0.06 under at Wichita, and no discount or “par” at Kansas City, Missouri truck bid locations.

Possible Solutions to Non-Convergence in CME Kansas HRW Wheat Futures

It appears that this lack of convergence at designated delivery elevator locations between cash and futures prices for HRW wheat has been due to a combination of wheat market supply-demand factors as well as issues concerning the design of the futures contract itself.  This is particularly true in regards to grain delivered by short futures position holders on CME Kansas HRW wheat futures contracts.

In the Chicago wheat futures contract, the CME has instituted a Variable Storage Rate (VSR) mechanism that systematically increases or adjusts the rate of storage paid on the warehouse receipts by long position holders during times periods when the true price of storage moves higher.   During times of tight storage when the implicit market value of storage space increases, this increased storage rate on warehouse receipts (as driven by the automatic VSR adjustment mechanism in the Chicago wheat contract) provides a disincentive for continued holding of warehouse receipts by long position holders, and tends to motivate “load out” cash sales in the wheat market.  Increased “load out” or cash sales are a primary means of helping to bring about cash-futures convergence.

According CME Kansas HRW wheat futures contract specifications, long position holders who have been delivered on can choose to “load out” (sell the grain in the cash market) or pay fixed, contract specified storage rates charged on the warehouse receipts that they are have been forced to accept delivery of.  These warehouse receipt storage rates are calculated on a daily basis, and are approximately $0.09 per bushel per month during the July-November period, and approximately $0.06 per bushel per month during December-June.  During times when excessive inventories of wheat exist, available storage space is at a premium, and the cash price penalty for “loading out” and selling cash wheat as opposed holding warehouse receipts and paying designated contract storage costs is high. As a result, long position holders who have been delivered on have an incentive to hold the warehouse receipts – continuing to pay designated futures contract storage costs on them – rather than selling in the cash market (i.e., loading out).

In summary, supply-demand conditions for wheat in Kansas and the U.S. are certainly a major factor encouraging wide wheat basis levels at this time.  However, during key futures contract delivery periods wide differences between CME Kansas HRW wheat futures and cash prices at the designated delivery elevators can be attributed to a lack of convergence between cash and futures prices – contrary to the intended original design of such futures contracts.

Among potential remedies to non-convergence in the CME Kansas HRW wheat futures contract include instituting a VSR on this contract as well, or to raise the storage rate paid on warehouse receipts high enough to motivate “load out” cash sales instead of storage.  An August 11, 2016 newsletter by Kansas State University titled “Non-Convergence of CME Hard Red Winter Wheat Futures and the Impact of Excessive Grain Inventories in Kanas” goes into more detail on the causes and potential remedies of non-convergence issues in HRW wheat futures.

slide1 slide2

 

KSU Wheat Market Outlook in Early September 2016 – Considering the “World Less China” and MY 2017/18 Wheat Scenarios

An analysis of U.S. and World wheat supply-demand factors and 2016-2017-2018 price prospects following the USDA’s August 12th Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports, and the market actions that have followed those reports will be available on the KSU AgManager website on Wednesday, September 7, 2016 (http://www.agmanager.info/default.asp).

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

***

Summary

Market Action

Since the USDA’s August 12th Crop Production and World Agricultural Supply and Demand Estimates (WASDE) report, U.S. and World wheat futures market prices traded sideways through August 22nd and then declined sharply through the end of August before modestly recovering through September 6th.

World Supply-Demand

For the “current crop” 2016/17 marketing year the USDA projected: 1) World wheat total supplies of 985.3 million metric tons (mmt) and total use of 732.5 mmt – both at record high levels, 2) that marginally higher trade continues in World wheat exports with 170.7 mmt in the “current” marketing year – up from 170.6 mmt last year, and up from 164.4 mmt two years ago, 3) World wheat ending stocks at a record high 252.8 mmt compared to 241.9 mmt last year, and 216.1 mmt two years ago, and 4) World wheat percent ending stocks-to-use (S/U) of 34.5% – up from 34.1% last year and from 30.6% two years ago – up to their highest level in 15 years (since MY 2001/02).

For a perspective on how historically large World total wheat stocks and World wheat percent stocks-to-use are, the 34-year low in World wheat ending stocks of 128.7 mmt and at least a 57-year low in percent ending stocks-to-use of 20.9% S/U both occurred in MY 2007/08, the last major World wheat “short crop” marketing year.  The “large crop-over supply” situation that exists in World and U.S. wheat markets continues to have a strong prevailing negative influence on World wheat prices.

“Not So Easily Perceived” Wheat Market Issues

The broader “large supply – low price” situation in the World wheat market may be “masking” or “obscuring” at least a couple of other significant 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 may help U.S. Hard Red Spring wheat markets and other sources of moderate to high protein wheat in the U.S. and abroad.  Second, while the supply of wheat in World markets overall is growing, the supply of wheat in the “World Less China” is projected to have “contracted” in “current crop” MY 2016/17 compared to a year ago to the tightest supply situation since MY 2013/14.

It is likely that significant World wheat production problems and/or trade disruptions would need to occur in coming months and early in year 2017 in order to have wheat prices recover significantly by spring-summer 2017.  Ongoing strength in the U.S. dollar exchange rate – although it has been weakening or “moderating” in recent months – also is a serious negative factor that is limiting U.S. wheat exports, resulting in higher U.S. wheat ending stocks and % ending stocks-to-use, and causing U.S. and Kansas wheat cash prices to fall sharply – down to the marketing loan rate in most of Kansas.

USDA U.S. Wheat Supply/Demand Forecast for “Current Crop” MY 2016/17

The USDA projected 2016 U.S. wheat plantings of 50.816 million acres (ma) – down 3.828 ma (-7.0%) from 2015.  The USDA also forecast 2016 harvested acres of 44.093 ma which would be down 3.001 ma (-6.4%) vs 2015.  Based on projected 2016 U.S. wheat yields of 52.6 bu/ac (up from 43.6 bu/ac in 2015), 2016 U.S. wheat production is projected to be 2.321 bb (vs 2.052 bb in 2015), with total supplies of 3.417 bb (up from 2.917 bb in “old crop” MY 2015/16), and total use of 2.317 bb (up from 1.936 bb in “old crop” MY 2015/16).

Given these numbers, the USDA projected “current crop” MY 2016/17 ending stocks of 1.100 bb (vs 981 mb a year ago), with percent ending stocks-to-use of 47.5% S/U (vs 50.7% last year).  U.S. wheat average prices are projected to be in the range of $3.35 to $4.05 (midpoint = $3.70 /bu) – down from $4.89 /bu in “old crop” MY 2015/16 and $5.99 /bu in MY 2014/15.   It is assumed by Kansas State University that these USDA projections for “current crop” MY 2016/17 have an 80% probability of occurring.

Alternative KSU U.S. Wheat S/D Forecast for “Current Crop” MY 2016/17

As an alternative to the USDA’s projection, one potential KSU-Scenario for U.S. wheat supply-demand and prices is presented for “current crop” MY 2016/17 – and is given a 20% probability of occurring.  Assuming the same 2016 acreage, yields, imports, and production as USDA, as well as food and seed use, the alternative scenarios assumes a) higher U.S. wheat exports (1.075 bb vs 985 mb by USDA), and b) lower feed and residual use (320 mb vs 330 mb by USDA).

KSU “Higher Exports with Spring 2017 U.S. Wheat Development Problems” Scenario (20% probability) assumes for “current crop” MY 2016/17: 2.321 bb production, 3.417 bb total supplies, 1.075 bb exports, 320 mb feed & residual use, 1.396 bb ending stocks,  40.50% S/U, & $4.25 /bu U.S. wheat average price.

KSU U.S. Wheat S/D Forecasts for “Next Crop” MY 2017/18

Two alternative KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “next crop” MY 2017/18.  These scenarios assume a 5% decline in U.S. wheat planted and harvested acreage in 2017 (with a 7% decline for U.S. winter wheat, and no changes for other spring wheat and durum wheat classes.  These KSU projections also assume at least a continued moderation in the value of the U.S. dollar during the “next crop” 2017/18 marketing year, with some improvement in U.S. wheat exports as a result.

KSU Scenario A) “Trend Yield, Higher Exports” Scenario (65% probability) assumes for “next crop” MY 2017/18: 48.258 ma planted, 41.873 ma harvested, 47.0 bu/ac trend yield, 2.072 bb production, 3.287 bb total supplies, 1.000 bb exports, 250 mb feed & residual use, 2.286 bb total use, 1.001 bb ending stocks, 43.79% S/U, & $3.95 /bu U.S. wheat average price; and

KSU Scenario B) “Lower Yield, Average Exports” Scenario (35% probability) assumes for “next crop” MY 2017/18: 48.258 ma planted, 41.873 ma harvested, 43.6 bu/ac lower yield, 1.922 bb production, 3.137 bb total supplies, 980 mb exports, 240 mb feed & residual use, 2.256 bb total use, 881 mb ending stocks, 39.05% S/U, & $4.35 /bu U.S. wheat average price.

slide1 slide2 slide3 slide4 slide5 slide6 slide7 slide8 slide9 slide10 slide11 slide12 slide13

KSU Corn Market Outlook in Late August 2016: USDA and KSU Price Forecasts for “Next Crop” MY 2016/17

An analysis of U.S. and World corn supply-demand factors and 2016/17 price prospects following the USDA’s August 12, 2016 USDA Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports is available on the KSU AgManager website:  http://www.agmanager.info/default.asp

Following is a summary of the article on “Corn Market Outlook in Late August 2016″ with the full article and accompanying analysis soon to be available on the KSU AgManager website at the following web address:

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

**************

Summary

Overview

Since the USDA’s August 12th World Agricultural Supply and Demand Estimates (WASDE) report, DEC 2016 CME corn futures have trended from the close of $3.33 per bushel that day up to a high of $3.44 ¼ on August 19th, before declining to a close of $3.15 ¾ on August 30th with fall harvest approaching.   The USDA’s forecast of a record large 2016 U.S. corn crop over 15 billion bushels (bb) and ending stocks of near 2.4 bb have dominated the perspective of the U.S. corn market.

Kansas Cash Corn Markets

Cash corn prices in Kansas have declined below $3.00 per bushel, but have not yet fallen to the marketing loan rate.  For example, on August 31st (a.m.) cash corn prices near Salina, Kansas in the central part of the state ranged from $2.25 to $2.63 per bushel – still above the Saline County marketing loan rate of $2.05 per bushel.  Similarly, cash corn prices near Garden City in southwest Kansas ranged from $2.66 to $2.72 per bushel – above the Finney County marketing loan rate of $2.19 per bushel.  When fall harvest begins it will be possible that cash prices could fall to the loan rate in these areas due to lack of available storage space in these and other areas in the state of Kansas.

Other Potential Market Factors

Other market factors to consider that could affect the U.S. corn market in what remains of 2016 through mid-2017 include:

1) the pace and timing in regards to how U.S. farmers market their 2016 corn crop – much of which will be placed in storage after fall harvest,

2) anticipation of continued strong use of 2015-2016 crop U.S. corn in domestic U.S. ethanol production and livestock feeding,

3) at least moderate strength in U.S. corn exports – driven largely by a poor harvest and lack of exportable supplies in Brazil, and

4) the possibility of broader U.S. and Foreign economic and financial system disruptions impacting grain, energy, and other commodity markets – such as unanticipated U.S. financial policy announcements by the U.S. Federal Reserve affecting U.S. interest rates, or geo-political events that could “shock” World energy markets.

USDA Supply-Demand Forecast for “New Crop” MY 2016/17

With USDA projections of 2016 U.S. corn plantings of 94.148 ma (up 6.149 ma from 2015), harvested acres of 86.550 ma (up 5.801 ma from 2015), record high projected yields of 175.1 bu/ac (vs 168.4 bu/ac in 2015 and the current record high of 171.0 bu/ac in 2014), 2016 U.S. corn production is forecast to be a record high 15.153 bb – up from 13.601 bb in 2015, the current record of 14.216 bb in 2014, and 13.829 bb in 2013.

With forecast “new crop” MY 2016/17 total supplies of 16.909 bb (record high), total use of 14.500 bb (record high), and projected ending stocks of 2.409 bb (16.61% S/U) – up from 1.706 bb (12.46% S/U) in “old crop” MY 2015/16 and the highest since 4.259 bb (54.90% S/U) in MY 2004/05 – U.S. corn prices are projected by the USDA to be in the range of $2.85-$3.45 (midpoint = $3.15 /bu) – being down from the $3.60 /bu midpoint estimate for “current” MY 2015/16. This scenario is given a 20% likelihood of occurring by KSU.

KSU Forecasts for “New Crop” MY 2016/17

Three alternative KSU-Scenarios for U.S. corn supply-demand and prices are presented for “new crop” MY 2016/17, with each assuming a lower U.S. corn yields and production than the August 12th USDA WASDE report.

KSU Scenario A) “Minor Crop Problems – 14.9 bb” Scenario (35% probability) assumes: 94.148 ma planted, 86.550 ma harvested, 172.0 bu/ac yield, 14.887 bb production, 16.743 bb total supplies, 14.450 bb total use, 2.293 bb ending stocks, 15.87% S/U, & $3.25 /bu U.S. corn average price for “new crop” MY 2016/17;

KSU Scenario B) “Moderate Crop Problems – 14.5 bb” Scenario (35% probability) assumes: 94.148 ma planted, 86.550 ma harvested, 168.0 bu/ac yield, 14.540 bb production, 16.396 bb total supplies, 14.344 bb total use, 2.052 bb ending stocks, 14.31% S/U, & $3.45 /bu U.S. corn average price for “new crop” MY 2016/17;

KSU Scenario C) “More Serious Crop Problems – 14.2 bb” Scenario (10% probability) assumes: 94.148 ma planted, 86.550 ma harvested, 164.0 bu/ac yield, 14.194 bb production, 16.137 bb total supplies, 14.239 bb total use, 1.898 bb ending stocks, 13.33% S/U, & $3.60 /bu U.S. corn average price for “new crop” MY 2016/17;

World Corn Supply-Demand

World corn production of 1,028.4 million metric tons (mmt) is projected for “new crop” MY 2016/17, up from 959.7 mmt in “old crop” MY 2015/16, and up from 1,013.6 mmt in MY 2014/15.

World corn total supplies of 1,237.7 mmt are projected for “new crop” MY 2016/17, up from 1,170.0 mmt in “old crop” MY 2015/16, and up from 1,188.9 mmt in MY 2014/15.  World corn exports of 137.25 mmt are projected for “new crop” MY 2016/17, up from 119.7 mmt in “old crop” MY 2015/16, but down from 141.7 mmt in MY 2014/15.  Projected World corn ending stocks of 220.8 mmt (21.7% S/U) in “new crop” MY 2016/17 are up from 209.3 mmt (21.9% S/U) in “old crop” MY 2015/16, and from 208.3 mmt (21.2% S/U) in MY 2014/15.

Brazilian Corn Production in 2016

Brazilian corn production in MY 2015/16 (produced in early-mid 2016) is estimated to be 68.5 mmt, down 16.5 mmt (down 19.5%) from MY 2014/15.  This shortfall in Brazilian corn production in 2016 has provided some support for U.S. corn exports and even ethanol production (via exports). But expectations of a record large 2016 U.S. corn crop have had a predominant negative impact on U.S. corn prices.  Brazilian corn production is forecast by the USDA to rebound back to 80 mmt in MY 2016/17 (2017 production).

Slide1 Slide2 Slide3 Slide4 Slide5 Slide6 Slide7 Slide8 Slide9 Slide10 Slide11 Slide12 Slide13

2016 KSU Risk and Profit Conference – Long Term Grain Market Overview (Bill Tierney – AgResource)

The Kansas State University Department of Agricultural Economics held is 2016 Risk and Profit Conference on Thursday-Friday, August 18-19, 2016 in Manhattan, Kansas.

Following are parts of the presentation by Bill Tierney, Chief Economist at AgResource, Chicago, Illinois titled A Long-Term View of Crop Prices: The Landscape Has Changed for US Crop Ag“.  

Following is Bill Tierney bio info:

Dr. William I. Tierney, Jr. PhD, is the Chief Economist for AgResource Company (Chicago). He joined the firm in October 2011. He has over 35 years of experience as an agricultural economist primarily in the area of
global crop market analysis. For 20 years Bill was a Professor in the Department of Ag Economics at Kansas State University. From 2003-2006, Bill served as the USDA’s Principal Grains Economist. In that capacity, Bill was in charge of the USDA’s monthly supply/demand projections and price forecasts for wheat and feed grains.
Other positions that Bill has held include: (1) Exec VP for Research for a national brokerage firm that served mostly US ethanol plants; (2) Head of North American Research for an international agribusiness consulting firm; (3) General Manager of Doane Advisory Services; and (4) Senior Ag Analyst for a Cargill commodity hedge fund. Just prior to joining AgResource, Bill served in Iraq for a year as a senior agricultural advisor for the US government. Bill is a graduate of Michigan State University and the University of Missouri.

This presentation was given on Friday, August 19th in the morning session.

Here is the part of that presentation focusing on Long Term Overall Perspective

Overall Crop Market Perspectives – Long Term

Slide1 Slide2 Slide3 Slide4 Slide5 Slide6 Slide7 Slide8 Slide9 Slide10 Slide11