KSU Wheat Market Outlook in July 2018: Weighing Exporter vs Rest-of-World %Stocks/Use

An analysis of U.S. and World wheat supply-demand factors and 2018-2019 price prospects following the July 12 USDA Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports, and the market actions that have followed those reports are available on the KSU AgManager website (http://www.agmanager.info/).

Following is a summary – with the full analysis-article for Wheat to be found at this web location:

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

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Wheat Market Outlook in July 2018

Daniel O’Brien – Extension Agricultural Economist, K-State Research and Extension

July 19, 2018

Wheat Futures & Cash Market Trends Following the July 12th USDA Reports

Since the USDA’s July 12th Crop Production and World Agricultural Supply and Demand Estimates (WASDE) report, CME SEPTEMBER 2018 Kansas Hard Red Winter (HRW) Wheat futures have traded mostly higher.  These reports were released during when hard red winter wheat harvest was nearing completion in Kansas, Oklahoma and Texas.  On the day of the reports (July 12, 2018), SEPT 2018 Kansas HRW wheat futures opened at $4.76 ¼, and traded as low as $4.71 ½ and as high as $4.86 ½ before closing $0.07 ¼ higher to $4.81 ¼ from the day prior.  The following four days SEPT 2018 HRW wheat futures trended lower, trading as high as $4.99 ½ on July 17th before closing at $4.96 ½ /bu on Thursday, July 19th (Figure 1).   

On July 19th – the 5th trading day after the USDA reports – Kansas cash wheat price terminal quotes in central Kansas ranged from $4.82 ½ to $4.98 ½ per bushel – with basis ranging from $0.14 under to $0.06 over SEPT 2018 futures (Figure 2).  Cash wheat prices in eastern Kansas grain terminals ranged from $4.66 ½ to $4.76 ½ with basis ranging from $0.30 under to $0.20 under SEPT 2018 futures.  These prices are up 36%-41% from the range of $3.42 ¼ to $3.83 ¼ /bu in late December 2017 in eastern and central Kansas – with basis at that time ranging from $0.80 under to $0.39 under nearby MARCH 2018 futures.   A Hard White Wheat (HWW) grain terminal bid was available in Wichita, Kansas for $5.02 ½ /bu, with a basis of $0.06 /bu over SEPT 2018 Kansas HRW wheat futures.

In western Kansas on July 19th with harvest nearly complete throughout the area, representative wheat elevator bids ranged from $4.62 to $4.77 /bu, with basis being from $0.30 under to $0.20 under SEPT 2018 futures.  These recent wheat cash price levels are up 31%-33% from $3.47 to $3.64 /bu in late December 2017 in western Kansas – when local basis varied from $0.85 under to $0.58 under MARCH 2018 futures.  

Lower 2018 production, higher protein levels in drought-damaged parts of the central and southern plains states of Texas, Oklahoma and Kansas, and to some degree foreign wheat crop concerns in competitive export countries such as Ukraine, Russia, and Australia, are the key market influencing factors credited for the increase in Kansas HRW wheat futures and cash prices since December 2017.  With this price strength, local wheat basis levels in Kansas that were “wide & weak” in December 2017 have strengthened by $0.45-$0.66 /bu in central Kansas, and by $0.38-$0.55 /bu in western Kansas as of July 19th

Early Harvest HRW Wheat Yield and Protein Results

Harvest results to date have shown low yields but higher protein in Oklahoma and parts of southern Kansas.  The July 13th Harvest Report of the U.S. Wheat Associates (http://www.uswheat.org/harvest) stated:

The 2018 hard red winter (HRW) harvest and sampling are more than 90% complete in Texas, Oklahoma, Kansas and southeast Colorado; and there was significant progress north through Nebraska and into southern South Dakota. Rain over the past week slowed harvest, as well as sample collection and processing, in eastern Colorado, northwest Kansas and western Nebraska. As a result, new official HRW data will be available in the July 20 Harvest Report, although Falling Number tests on a few existing samples show a very slight improvement in what remains a sound crop.”

“Industry contacts report that test weights in Nebraska and South Dakota are above 60 lbs/bu (78.9 kg/hl) with continued good protein levels. HRW harvest is also underway in Oregon (11% complete), and just starting in Washington and Idaho. In addition, domestic millers continue to be pleased with absorption and stability in the new crop.”

U.S. Wheat Associates indicated that according to its samples that average protein for the 2018 U.S. hard red winter wheat (HRW) crop averaged 12.8%, with average test weight of 60.3 lb/bu, 11.4% moisture, dockage of 0.5%. a falling number rating of 385 seconds, and 1.6% defects.  This compares to the 2017 U.S. HRW Wheat crop which according to U.S. Wheat Associates test data averaged 11.4% protein, 60.8 lbs/bu test weight, 10.6% moisture, 0.6% dockage, 367 seconds for the Falling Number test, and 1.1% defects.

Consequently, the moderately lower yields occurring during the 2018 HRW harvest in Kansas and Oklahoma (i.e., 38.0 bu/ac in 2018 in Kansas vs 48.0 bu/ac a year earlier, and 25.0 bu/ac in Oklahoma in 2018 vs 34.0 bu/ac a year ago) have been partially offset income-wise by higher protein wheat.

Key World Wheat Supply-Demand Results in the June 12th USDA WASDE Report

For the “new crop” 2018/19 marketing year (MY) which began on June 1, 2018, the USDA projected the following (Figures 13 thru 16b, Tables 2 thru 9):

World wheat total supplies in “new crop” MY 2018/19 would be a near record 1,009.75 million metric tons (mmt) accompanied by record high total use of 748.9 mmt – down 0.5% and up 1.0%, respectively, from “old crop” MY 2017/18.  The USDA in essence projects that the recent “large supply – large use” situation that has persisted for the global wheat market since the last “supply-demand” period in MY 2012/13 will continue (Figure 13).  However, there are concerns that 2018-2019 wheat crop production prospects and export supply potential of parts of the European Union, the Black Sea Region (Russia & Ukraine), and Australia (including several major World wheat exporters).   

CommentaryKSU: These aggregate World supply and use numbers do NOT bring light to the shortage of high protein wheat that is problematic in World markets, OR the sizable wheat stocks held by China that are isolated from the World wheat market.

World wheat exports are forecast to also be a new record high of 185.45 mmt in the “new crop” 2018/19 marketing year – up from a 181.9 mmt in “old crop” MY 2017/18, the previous record high of 183.2 mmt in MY 2016/17, and from 172.8 mmt in MY 2015/16 (Figure 13, Table 3).  While World wheat exports are forecast to increase by 11.8% since MY 2013/14 (i.e., 1 year after  the short crop year of MY 2012/13), over the same period U.S. wheat exports are projected to decline by 17.1% from 1.176 billion bushels in MY 2013/14 to 975 million bushels (mb) in “new crop” MY 2018/19. 

CommentaryKSU: Concerns about adequacy of exportable supplies in other major wheat exporting countries – aside from the U.S. – has raised the possibility of markedly stronger U.S. wheat exports occurring in “new crop” MY 2018/19.  This discussion reinforces the idea that the U.S. is currently positioned as an “emergency supplier of last resort” to many global wheat importers.     

World wheat ending stocks are projected to be 260.9 mmt in “new crop” MY 2018/19 – the 2nd highest on record following the record high of 273.5 mmt in “old crop” MY 2017/18 (Figure 13, Table 8).  World wheat ending stocks have been growing an average of 13.8 mmt per marketing year from the low of 177.9 mmt in MY 2012/13 – out-pacing the annual growth in total use of 10.3 mmt per marketing year. 

World wheat percent ending stocks-to-use (S/U) are forecast to be 34.8% in “new crop” MY 2018/19 – the 2nd highest on record (Figures 14a-b, Table 9).  The record high is 36.9% in “old crop” MY 2017/18.  World wheat % stocks-to-use has consistently increased each year since MY 2012/13 until the current year.  Since 25.89% stocks/use in short crop MY 2012/13, World wheat percent (%) ending stocks-to-use has increased to 28.3% in MY 2013/14; 31.35% in MY 2014/15;  34.4%-34.8% in MY 2015/16-2016/17; and to the record high of 36.9% S/U in “old crop” MY 2017/18; before the projected moderate decline to 34.8% in “new crop” MY 2018/19.

World-Less-China” Wheat Supply-Demand

The broader “large crop-over supply-low price” situation in the World wheat market may be “obscuring” some important underlying market issues – particularly in regards to the “masking” effect of Chinese wheat stocks on available World wheat supplies and stocks.  

From a World-Less-China perspective, forecast ending stocks-to-use of 19.9% would be the lowest level in 11 years (Table 9, Figures 15a-b)“World-Less-China” wheat ending stocks-to-use would be down sharply from 23.5% in “old crop” MY 2017/18, and from the range of 22.05% to 27.5% during the MY 2008/09 – MY 2017/18 period. 

IF this China supply isolation factor eventually leads to noticeably tighter available global supplies of purchasable wheat for buyers to gain access to in coming months, it could have a significant positive impact on U.S. and World wheat market prices in “new crop” MY 2018/19.  However, unless there is this change in the broader, overriding focus of the World wheat market AWAY FROM large aggregate global supplies over TO available “World-Less-China supplies, the attention of the World wheat market and market prices may not change in a positive direction.  The information in the following section may be an impetus for that change.

“Major Exporter” vs “Rest of World-less China” Wheat Supply-Demand Issues

Ending stocks among global wheat exporters including Argentina, Australia, Canada, the European Union, Russia, Ukraine, and the United States are projected to decline to 51.3 mmt in “new crop” MY 2018/19.  This amount would be down from 67.2 mmt in “old crop” MY 2017/18, and from the recent high of 68.5 mmt in MY 2016/17 (Figures 16).  Excluding the United States with its current large stocks situation, the ending stocks of the remaining six (6) major wheat exporters have declined to 24.5 mmt in “new crop” MY 2018/19.  This amount would be down from the recent high of 37.2 mmt in “old crop” MY 2017/18 and from the 36.4 mmt in MY 2016/17.

Rest of the World (ROW) Wheat ending stocks:  Excluding the major seven (7) global wheat exporters Argentina, Australia, Canada, the European Union, Russia, Ukraine, and the United States – wheat ending stocks for the Rest of the World (ROW) are projected to increase to a record high 209.6 mmt in “new crop” MY 2018/19.  This amount would be up from 206.3 mmt in “old crop” MY 2017/18, and up from 188.8 mmt in MY 2016/17.  Excluding China with its current large stocks situation – and limited participation in World wheat trade, the ending stocks of the Rest of the World-less-China have decreased to 124.8 mmt in “new crop” MY 2018/19 (Figure 17).  This amount would be down from the recent high of 146.7 mmt in “old crop” MY 2017/18, from 146.3 mmt in MY 2016/17, and the record high of 147.2 mmt in MY 2015/16.

Projected percent (%) ending stocks-to-use among global wheat exporters including Argentina, Australia, Canada, the European Union, Russia, Ukraine, and the United States are projected to decline to 30.7% in “new crop” MY 2018/19 – down from 31.9% in “old crop” MY 2017/18, from 31.6% in MY 2016/17 and the recent high of 32.7% in MY 2015/16 (Figure 16)Excluding the United States with its current large stocks situation, the percent (%) ending stocks-to-use of the remaining six (6) major exporters have declined to 26.5% in “new crop” MY 2018/19.  This amount would be down from 27.9% in “old crop” MY 2017/18, 27.3% in MY 2016/17, and the recent high of 28.2% in MY 2015/16.

CommentaryKSU: These results show that while World wheat ending stocks have declined moderately, “under the surface” of those numbers, wheat stocks are “tighter” among World exporters than they are for the rest of the World.  Tighter wheat stocks among exporters is a positive factor for U.S. wheat market price prospects (since it could eventually lead to larger U.S. wheat exports in “new crop” MY 2018/19.

U.S. Wheat Supply/Demand for “New Crop” MY 2018/19

The USDA released their wheat production, supply-demand and price projections for the U.S. for “new crop” MY 2017/18 in the July 12th Crop Production & WASDE reports (Tables 1a-b).   

U.S. wheat plantings are forecast to be 47.821 million acres (ma) in 2018, up from the record low of 46.012 ma in 2017, but down from 50.119 ma in 2016 (Table 1, Figure 5)Harvested acres are forecast at 39.571 ma in 2018 (82.75% harvested-to-planted), up from the record low of 37.586 ma (81.7% harvested-to-planted) in 2017, but down from 43.850 ma in 2016 (87.5% harvested-to-planted) (Table 1, Figure 5).   The 2018 U.S. average wheat yield is estimated at 47.5 bu/ac, up from 46.3 bu/ac in 2017, but down from the 2016 record high of 52.7 bu/acre (Table 1, Figure 6)

Wheat production in the U.S. in 2018 is forecast to be 1.881 billion bushels (bb), up from 1.741 bb in 2017, but down from 2.309 bb in 2016.  Projected “new crop” MY 2018/19 total supplies are forecast at 3.117 bb, up from 3.079 bb in “old crop” MY 2017/18, and down from 3.402 bb in MY 2016/17 (Table 1, Figure 7)

U.S. Wheat total use of 2.132 bb is forecast for “new crop” MY 2018/19 (up 35 mb from June), up from 1.978 bb in “old crop” MY 2017/18 (down 18 mb from June), and from 2.222 bb in MY 2016/17 (Table 1, Figure 8).  By usage category, U.S. wheat exports are projected to be 975 mb (up 25 mb from June) in “new crop” MY 2018/19, and up from 901 mb in “old crop” MY 2017/18, while being down from 1.051 bb in MY 2016/17 (Table 1, Figures 9 & 10)

CommentaryKSU: U.S. wheat exports fell to 47-year lows of 778 mb and 864 mb in MY 2015/16 and MY 2014/15, respectively, to levels just marginally above those pre-“Russian Grain Deal” in 1972.  This is more evidence of the only marginally competitive position that U.S. wheat exports find themselves in among foreign export competitors in recent years.  However, tightening supplies of foreign wheat exporters may cause U.S. wheat exports to strengthen in the later part of “new crop” MY 2018/19 (i.e., likely fall 2018)

Food Use of U.S. wheat is projected to be 965 million bushels (mb) in “new crop” MY 2018/19, up marginally from 963 mb in “old crop” MY 2017/18, and trending higher from 943 mb in MY 2016/17 (Table 1, Figure 8).   Feed & Residual Use of U.S. wheat is projected to be 130 mb in “new crop” MY 2018/19 (up 10 mb from June), up from 50 mb in “old crop” MY 2017/18 (down 20 mb from June), and from 161 mb in MY 2016/17 (Table 1, Figure 8).  

CommentaryKSU: With the USDA’s forecast of tighter U.S. corn and total feedgrain supplies along with higher feedgrain prices, the USDA is anticipating that feeding wheat to livestock will become more economically viable. 

The USDA projected “new crop” MY 2018/19 ending stocks to be 985 mb (46.2% stocks/Use), down from 1.100 bb in “old crop” MY 2017/18 (up 20 mb from June) (55.6% stocks/use), and 1.181 bb in MY 2016/17 (53.15% stocks/use) (Table 1, Figures 11 & 12).   

CommentaryKSU: Although only a moderate reduction, the forecast of 985 mb in ending stocks for “new crop” MY 2018/19 is the lowest in five (5) years since 752 mb (37.3% stocks/use) in MY 2014/15.  Still, until either a major wheat production shortfall or what would now be a “surprise” surge in U.S. wheat exports occurs, the U.S. will likely remain in the current “large supply – large ending stocks” situation.

United States’ wheat prices are projected to be in the range of $4.50-$5.50 /bu – averaging $5.00 /bu in “new crop” MY 2018/19 (down $0.10 /bu from June).  This would be up from $4.73 /bu in “old crop” MY 2017/18 (down $0.02 /bu from June), from $3.89 in MY 2016/17, and $4.89 /bu in MY 2015/16, but still down from $5.99 /bu in MY 2014/15 (Table 1, Figures 11 & 12).   CommentaryKSU: It is estimated by KSU that these USDA projections for “new crop” MY 2018/19 have a 50% probability of occurring.

Three Alternative KSU U.S. Wheat S/D Forecast for “New Crop” MY 2018/19

To represent possible alternative outcomes from the USDA’s July 12th projection, three potential KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “new crop” MY 2018/19 (Table 1a, Figure 11).    

KSU Scenario 1) “Higher Yields & Production” Scenario (5% probability):   This scenario assumes that there will be 47.821 ma planted, 82.75% harvested-to-planted, 39.571 ma harvested, 48.5 bu/ac average yield (up 1.0 bu/ac from USDA), 1.919 bb production (up 38 mb from USDA), 3.154 bb total supplies (up 38 mb from USDA), 975 mb exports, 130 mb feed & residual use, 2.132 bb total use, 1.022 bb ending stocks (up 38 mb from USDA), 47.9% Stocks/Use (up 1.75% S/U from USDA), & $4.90 /bu U.S. wheat average price (down $0.10 /bu from USDA).

KSU Scenario 2) “Higher Exports” Scenario (35% probability):   This scenario assumes that there will be 47.821 ma planted, 82.75% harvested-to-planted, 39.571 ma harvested, 47.5 bu/ac average yield, 1.881 bb production, 3.117 bb total supplies, 1.175 bb exports (up 200 mb from USDA), 130 mb feed & residual use, 2.332 bb total use (up 200 mb from USDA), 746 mb ending stocks (down 200 mb from USDA), 31.99% Stocks/Use (down 14.2% S/U from USDA), & $6.15 /bu U.S. wheat average price (up $1.15 /bu from USDA).

KSU Scenario 3) “Lower Exports” Scenario (10% probability):   This scenario assumes that there will be 47.821 ma planted, 82.75% harvested-to-planted, 39.571 ma harvested, 47.5 bu/ac average yield, 1.881 bb production, 3.117 bb total supplies, 775 mb exports (down 200 mb from USDA), 130 mb feed & residual use, 1.932 bb total use (down 200 mb from USDA), 1.146 bb ending stocks (up 200 mb from USDA), 59.32% Stocks/Use (up 13.1% S/U from USDA), & $4.50 /bu U.S. wheat average price (down $0.50 /bu from USDA).

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KSU Wheat Market Outlook in Mid-June 2018: HRW Wheat Harvest Markets with Protein in Demand

An analysis of U.S. and World wheat supply-demand factors and 2018-2019 price prospects following the June 12 USDA Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports, and the market actions that have followed those reports are available on the KSU AgManager website (http://www.agmanager.info/).

Following is a summary – with the full analysis-article for Wheat to be found at this web location:

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

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Wheat Market Outlook in Mid-June 2018

Daniel O’Brien – Extension Agricultural Economist, K-State Research and Extension

June 14, 2018

A. Wheat Futures & Cash Market Trends Following the June 12th USDA Reports

Since the USDA’s June 12th Crop Production and World Agricultural Supply and Demand Estimates (WASDE) report, CME JULY 2018 Kansas Hard Red Winter (HRW) Wheat futures have traded first higher and then lower again.  These reports were released during a time of harvest price pressure, when 2018 hard red winter wheat harvest was over half done in Oklahoma and Texas, and beginning in Kansas.  On the day of the report (June 12, 2018), JULY 2018 Kansas HRW wheat futures opened at $5.34 ½ and traded as high as $5.55 ½ before closing higher to $5.53 ½ that day.  The following two days JULY 2018 HRW wheat futures trended lower, closing at $5.39 /bu on Wednesday, June 13th and $5.22 ¼ /bu on Thursday, June 14th (Figure 1).   

On June 14th – the 2nd day after the USDA reports – Kansas cash wheat price terminal quotes in central and eastern Kansas ranged from $5.02 ¼ to $5.42 ¼ per bushel – with basis ranging from $0.20 under to $0.20 over JULY 2018 futures (Figure 2).  These prices are up 41%-47% from the range of $3.42 ¼ to $3.83 ¼ /bu in late December 2017 in eastern and central Kansas – with basis at that time ranging from $0.80 under to $0.39 under nearby MARCH 2018 futures.   A terminal Hard White Wheat (HWW) bid was available in Wichita, Kansas for $5.37 ¼ /bu, with a basis of $0.15 /bu over JULY 2018 Kansas HRW wheat futures.

In western Kansas on June 14th with harvest well underway to the south, representative wheat elevator bids ranged from $4.72 to $5.07 /bu, with basis being from $0.50 under to $0.15 under JULY 2018 futures.  These recent wheat cash price levels are up 36%-39% from $3.47 to $3.64 /bu in late December 2018 in western Kansas – when local basis varied from $0.85 under to $0.58 under MARCH 2018 futures.  

Lower 2018 production, higher protein levels in drought-damaged parts of the central and southern plains states of Texas, Oklahoma and Kansas, and to some degree foreign wheat crop concerns in competitive export countries such as Ukraine, Russia, and Australia, are the key market influencing factors credited for the increase in Kansas HRW wheat futures and cash prices since December 2017.  With this prices strength, local wheat basis levels in Kansas that were “wide and weak” in December 2017 have strengthened by $0.59-$0.60 /bu in central Kansas, and by $0.35-$0.43 /bu in western Kansas as of June 14. 

 

B. Early Harvest HRW Wheat Yield & Protein Results

Harvest results to date have shown low yields but higher protein in Oklahoma and parts of southern Kansas.  The June 8th Harvest Report of the U.S. Wheat Associates (http://www.uswheat.org/harvest) stated:

“Yields continue to be variable with a current average estimated at under 25 bu/ac (1.7 tons/ha). Hot temperatures forecast for next week (i.e., June 11-15) should push maturity. The first 60 samples are in for analysis with averages from 17 samples originating in Oklahoma reported. Test weights with a few exceptions ran above 60 lb/bu (78.9 kg/hl), which is a bit of a surprise given the environmental conditions in the area. Protein averaged between 11% and 12% (12% moisture basis).”

A report via Reuters indicates the following (“U.S. Grain Buyers Grab for High-Protein Wheat, Boosting Cash Prices.”, Reuters – Julie Ingwerson, June 14, 2018): 

“Cash prices for hard red winter (HRW) wheat in the southern U.S. Plains are surging as buyers scramble to lock up supplies of high-protein wheat from what could be the second-smallest crop in decades, traders said. Amid a global shortage of high-protein wheat, commercial grain handlers need the new-crop grain to blend into their stocks to salvage the lower-quality wheat left in their bins from last year. …….”

“The firm cash market reflects buyers’ hunger for high-protein wheat after two consecutive low-protein harvests that averaged 11.5 percent or less. Flour millers and exporters largely spurned the 2016 and 2017 HRW wheat harvests, seeking alternate supplies from outside of Texas, Oklahoma and Kansas. ……. Early returns from the 2018 harvest have been encouraging. Protein levels in HRW wheat samples from Oklahoma and southern Kansas have averaged 13 percent, according to weekly data from Plains Grains Inc., a trade group that conducts a wheat quality survey, and the Kansas Wheat Commission.”

Consequently, the lower yields occurring during early harvest 2018 in these central and southern plains states are being partially offset income-wise by higher protein wheat.  On a net income per acre basis, farmers are still likely to be worse off financially, as the higher price received for higher protein content HRW wheat does not compensate enough for the lower yield to sell on a per acre basis.

 

C. Key World Wheat Supply-Demand Results in the June 12th USDA WASDE Report

For the “new crop” 2018/19 marketing year (MY) beginning on June 1, 2018, the USDA projected the following (Figures 13 through 15b, Tables 2 through 9):

World wheat total supplies in “new crop” MY 2018/19 would be a record high 1,017.1 million metric tons (mmt) accompanied by record high total use of 750.9 mmt – up 0.1% and 1.0%, respectively, from “old crop” MY 2017/18.  The USDA in essence projects that the recent “large supply – large use” situation that has persisted since the last “supply-demand” period in MY 2012/13 will continue (Figure 13).  Concerns about 2018-2019 wheat crop production prospects in the Black Sea Region, Australia, and the U.S. could bring lower production and supplies – possibly causing World wheat supply-demand balances to decline in upcoming WASDE reports.  However, if these World wheat production reductions do NOT occur, then the current World wheat oversupply and associated low price situation is likely to persist.  

CommentaryKSU: These aggregate World supply and use numbers do NOT bring light to the shortage of high protein wheat that exists in World markets, OR the sizable wheat stocks held by China that are isolated from the World wheat market.

World wheat exports will also be a new record high 187.3 mmt in the “new crop” 2018/19 marketing year – up from a 182.8 mmt in “old crop” MY 2017/18, the previous record high of 183.3 mmt in MY 2016/17, and from 172.8 mmt in MY 2015/16 (Figure 13, Table 3).  While World wheat exports are forecast to increase by 12.9% since MY 2013/14 (i.e., 1 year after the short crop year of MY 2012/13), United States’ wheat exports are projected to decline by 19.2% from 1.176 billion bushels to 950 million bushels (mb) in “new crop” MY 2018/19. 

CommentaryKSU: This lack of growth in U.S. exports relative to foreign export competitors raises questions about whether the U.S. should focus more on HRW wheat protein and quality characteristics to differentiate it’s exportable wheat product. Also, a strengthening in the U.S. dollar exchange rate relative to export competitors with weak currency exchange rates continues to be a negative factor limiting the competitive affordability of U.S. wheat exports in World markets.  

World wheat ending stocks are projected to be 266.2 mmt in “new crop” MY 2018/19 – the 2nd highest on record following the high of 272.4 mmt in “old crop” MY 2017/18 (Figure 13, Table 8).  World wheat ending stocks have been growing an average of 14.7 mmt per marketing year from the low of 177.9 mmt in MY 2012/13, out-pacing the annual growth in total use of 10.6 mmt per marketing year – leading to growth in ending stocks. 

World wheat percent ending stocks-to-use (S/U) are forecast to be 35.45% in “new crop” MY 2018/19 – the 2nd highest on record (Figures 14a-b, Table 9).  The record was 36.65% in “old crop” MY 2017/18.  World wheat % stocks-to-use consistently increased each year from 25.89% in the short crop MY 2012/13 to current levels of 36.65% S/U in “old crop” MY 2017/18, and the USDA projection of 35.45% in “new crop” MY 2018/19.

CommentaryKSU: These results provide evidence that pace of growth in World wheat supplies has been faster than growth in total use since MY 2012/13 – leading to the current World oversupply situation and lack of sales opportunities and weaker prices for wheat of average protein and quality characteristics.

D. World-Less-China” Wheat Supply-Demand & the “China Supply Isolation” Factor

The broader “large crop-over supply-low price” situation in the World wheat market may be “obscuring” some important underlying market issues – particularly in regards to the “masking” effect of Chinese wheat stocks on available World wheat supplies and stocks.  

Total supplies and % ending stocks-to-use of wheat in World markets is projected to grow to record levels – with World wheat ending stocks-to-use of 35.45% in “new crop” MY 2018/19 (Figures 13 thru 14b, Table 8).  However, from a World-Less-China perspective, forecast ending stocks-to-use of 20.2% would be the lowest level in 11 years (Table 9, Figures 15a-b)“World-Less-China” wheat ending stocks-to-use would be down sharply from 23.2% in “old crop” MY 2017/18, and from the range of 22.05% to 27.5% during the MY 2008/09 – MY 2017/18 period. 

IF this China supply isolation factor eventually leads to noticeably tighter available global supplies of purchasable wheat for buyers to gain access to in coming months, it could have a significant positive impact on U.S. and World wheat market prices in “new crop” MY 2018/19.  However, unless there is this change in the broader, overriding focus of the World wheat market AWAY FROM aggregate global supplies over TO available “World-Less-China supplies the attention of the World wheat market may not change in this direction.

 

E. U.S. Wheat Supply/Demand for “New Crop” MY 2018/19

The USDA released their wheat production, supply-demand and price projections for the U.S. for “new crop” MY 2017/18 in the June 12th Crop Production & WASDE reports (Tables 1a-b).   

U.S. wheat plantings are forecast to be 47.339 million acres (ma) in 2018, up from the record low of 46.012 ma in 2017, but down from 50.119 ma in 2016 (Table 1, Figure 5)Harvested acres are forecast at 38.9 ma in 2018 (82.3% harvested-to-planted), up from the record low of 37.586 ma (81.7% harvested-to-planted) in 2017, but down from 43.850 ma in 2016 (87.5% harvested-to-planted) (Table 1, Figure 5).   The 2018 U.S. average wheat yield is estimated at 46.9 bu/ac, up from 46.3 bu/ac in 2017, but down from the 2016 record high of 52.7 bu/acre (Table 1, Figure 6)

Wheat production in the U.S. in 2018 is forecast to be 1.827 billion bushels (bb), up from 1.741 bb in 2017, but down from 2.309 bb in 2016.  Projected “new crop” MY 2018/19 total supplies are forecast at 3.043 bb, down from 3.076 bb in “old crop” MY 2017/18, and down from 3.402 bb in MY 2016/17 (Table 1, Figure 7)

U.S. Wheat total use of 2.097 bb is forecast for “new crop” MY 2018/19, up from 1.996 bb in “old crop” MY 2017/18, and from 2.222 bb in MY 2016/17 (Table 1, Figure 8).  By usage category, U.S. wheat exports are projected to be 950 mb in “new crop” MY 2018/19, up from 900 mb in “old crop” MY 2017/18, while being down from 1.055 bb in MY 2016/17 (Table 1, Figures 9 & 10)

CommentaryKSU: U.S. wheat exports fell to 47 year lows of 778 mb and 864 mb in MY 2015/16 and MY 2014/15, respectively, to levels just marginally above those pre-“Russian Grain Deal” in 1972.  This is more evidence of the only marginally competitive position that U.S. wheat exports find themselves in among foreign export competitors I recent years. 

Food Use of U.S. wheat is projected to be 965 million bushels (mb) in “new crop” MY 2018/19, up marginally from 963 mb in “old crop” MY 2017/18, and trending higher from 943 mb in MY 2016/17 (Table 1, Figure 8).   Feed & Residual Use of U.S. wheat is projected to be 120 mb in “new crop” MY 2018/19, up from 70 mb in “old crop” MY 2017/18, and from 156 mb in MY 2016/17 (Table 1, Figure 8).  

CommentaryKSU: With the USDA’s forecast of tighter U.S. corn and total feedgrain supplies along with higher feedgrain prices, the USDA is anticipating that feeding wheat to livestock will become more economically viable. 

The USDA projected “new crop” MY 2018/19 ending stocks to be 946 mb (45.1% Stocks/Use), down from 1.080 bb in “old crop” MY 2017/18 (54.1% stocks/use), and 1.181 bb in MY 2016/17 (53.15% stocks/use) (Table 1, Figures 11 & 12).   

CommentaryKSU: The anticipation of markedly lower U.S. 2018 HRW wheat production is having the end effect on U.S. wheat supply-demand balances of dropping ending stocks below 1.00 bb and ending stocks-to-use below 50%. To move ending stocks and % stocks-to-use much lower, it may be necessary to sharply increase U.S. wheat exports and total usage.   

United States’ wheat prices are projected to average $5.10 /bu in “new crop” MY 2018/19, up from $4.75 /bu in “old crop” MY 2017/18, from $3.89 in MY 2016/17, and $4.89 /bu in MY 2015/16, but still down from $5.99 /bu in MY 2014/15 (Table 1, Figures 11 & 12)  It is estimated by KSU that these USDA projections for “new crop” MY 2018/19 have a 60% probability of occurring.

 

F. Three Alternative KSU U.S. Wheat S/D Forecast for “New Crop” MY 2018/19

To represent possible alternative outcomes from the USDA’s June 12th projection, three potential KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “new crop” MY 2018/19 (Table 1a, Figure 11).    

KSU Scenario 1) “Lower Production” Scenario (25% probability):   This scenario assumes that there will be 47.339 ma planted, 80.6% harvested-to-planted, 38.155 ma harvested, 45.0 bu/ac average yield, 1.717 bb production, 2.932 bb total supplies, 950 mb exports, 120 mb feed & residual use, 2.097 bb total use, 835 mb ending stocks, 39.82% Stocks/Use, & $5.75 /bu U.S. wheat average price.

KSU Scenario 2) “Higher Exports” Scenario (15% probability):   This scenario assumes that there will be 47.339 ma planted, 80.6% harvested-to-planted, 38.155 ma harvested, 46.9 bu/ac average yield, 1.827 bb production, 3.043 bb total supplies, 1.125 bb exports, 120 mb feed & residual use, 2.272 bb total use, 771 mb ending stocks, 33.93% Stocks/Use, & $6.20 /bu U.S. wheat average price.

KSU Scenario 3) “Lower Production & Higher Exports” Scenario (5% probability):   This scenario assumes that there will be 47.339 ma planted, 80.6% harvested-to-planted, 38.155 ma harvested, 45.0 bu/ac average yield, 1.717 bb production, 2.932 bb total supplies, 1.125 bb exports, 120 mb feed & residual use, 2.272 bb total use, 660 mb ending stocks, 29.05% Stocks/Use, & $6.55 /bu U.S. wheat average price.

More from the 2018 Ag Commodity Futures Conf, Overland Park, KS, April 5-6 – Experts Overstate Crop Insurance Competition with CME

The 2018 Agricultural Commodity Futures Conference was held in Overland Park, Kansas on April 5-6, 2018.  This meeting was sponsored by the Commodity Futures Trading Commission and the Center for Risk Management Education and Research in the Kansas State University Department of Agricultural Economics.

The agenda for this conference and a number presentations are available at the following web location:

http://www.k-state.edu/riskmanagement/conference.html

Following is the second of two articles by KSU Agricultural Economics Art Barnaby and Daniel O’Brien discussing the findings of the conference – with a focus on the relationship between crop insurance and grain futures.  This article is also available at the following web address on the KSU AgManager.info website:

http://www.agmanager.info/crop-insurance/risk-management-strategies/experts-overstate-crop-insurance-competition-cme

 

Experts Overstate Crop Insurance Competition with CME

Prepared by

G. A. (Art) Barnaby, Jr. (barnaby@ksu.edu) , Professor, Dept. of Agricultural Economics

Daniel O’Brien (dobrien@ksu.edu), Extension Agricultural Economist

K-State Research and Extension, Kansas State University, Manhattan, KS 66506

April 18, 2018.

Summary

Kansas State University and the Commodity Futures Trading Commission (CFTC) recently held a joint conference on the lack of convergence in grain futures.  In addition to hedges, convergence is required for crop insurance claims to work properly.  Many in the grain industry still think revenue-based crop insurance tools compete with their grain futures contracts.  Making this argument even more confusing is a new report from Harvard and other Law Schools[i].

[i] Art Barnaby’s Disclaimer.  Harvard Law did contact me and asked me to put together a group of people to discuss these Farm Bill and risk management issues.  I don’t want to speak for the group, but as for myself, I agree very little in this report.  We gave them the other side of the crop insurance, commodity titles, and hedging story, but those comments were not included in their report.

Issue #1: Crop Insurance

As a group, there are still a large number of traders who think government-backed crop insurance competes with them for the farmer’s risk management dollar.  Many of these misunderstandings originated from academic researchers, and more recently by a group of Law Schools. 

The FBLE group (see list of Farm Bill Law Enterprise (FBLE) member institutions in AgManager article) argue the existing Harvest Price Option (HPO) subsidies encourage over-exposure to the futures markets and farmers should not forward price more than a third of their expected crop. 

However, Smith, et al., argue that price coverage is available via private futures market exchanges, therefore revenue insurance is unnecessary.  See Smith, Vincent H., Joseph W. Glauber, and Barry K. Goodwin, “Time to Reform the US Federal Agricultural Insurance Program”, American Enterprise Institute, 2017.    As a result, one academic expert suggests farmers should use futures, and another academician says no, farmers are over-exposed to the futures.

However, both are wrong.  Once farmers plant their crop or hold unpriced inventory they are 100% exposed to the real cash market of potentially falling prices.  Following the one-third argument, farmers would still have two-thirds of their crop exposed to downside price risk.

Issue #2: Limited Put Competition

The USDA-backed revenue insurance provides limited competition to Chicago Mercantile Exchange (CME) traded puts, but not calls.  About 79% of Revenue Protection (RP) insured corn acres are insured at 80% or less.  An 80% RP insured farmer currently has an effective “put” strike at $3.17 (80% X $3.96 for 2018) on new crop corn.  Farmers insured with 80% RP coverage and an average crop will need an October average closing December 2018 corn futures price below $3.17 to trigger payments. 

However, this insurance “put” is way out of the money with current new-crop corn futures trading over $4, so the competition with CME is “small”.   If yields are above average, then the effective RP “put” strike is even lower.  Farmers can always produce their way out of a RP indemnity claim.

Note that the $3.96 corn strike price and October settlement price applies to crop insurance in Kansas, Northern Great Plains states, and Corn Belt states for the 2018 crop insurance contract.  The crop insurance strike price is set earlier and the settlement price is determined earlier in Southern states. 

Issue #3: Call Options

Revenue Protection is mis-named because when prices increase above the base price, RP is no longer a revenue contract.  RP turns in to a yield-protection contract only.  At that point, the only difference between RP and Yield Protection (YP), is that YP indemnifies guaranteed bushels at a below-market price, while RP indemnifies the same lost bushel at the current market price. 

This is only complicated because the critics make it complicated in order create confusion among decision-makers, when it is actually simple.  Should farmers be paid for their crop losses at a below-market price, or at the current market price?

Issue #4: Put Option Competition with Commodity Programs

The Farm Service Agency’s (FSA) Price Loss Coverage (PLC) provides a free “put” on old crop held in “inventory”.  While the crop has been harvested, the PLC payment rate is applied to 85% of the farmer’s base acres times the historical program yield and subject to sequestration cuts.  This payment procedure removes any yield risk, unlike the new-crop out-of-the money “put” in RP.  The PLC “put” corn strike of $3.70 is based on the after-harvest 12-month national Marketing Year Average (MYA) price.  USDA’s MYA price is normally about 15 to cents lower than futures and PLC payments are made about a year after harvest, if any. 

Agricultural Risk Coverage (ARC) also provides some old crop “put” protection, but it is more complicated than PLC because the payment is tied to the county yield and the strike price is a 5-year Olympic average of the USDA-determined price.  The current Olympic average USDA price is $3.95 X 86% setting the effective corn “put” strike at $3.40 with an average county yield.  Both PLC and ARC have a price stop-loss at the loan rate.  There can be a little slippage because the ARC-PLC trigger payments are based on NASS prices and loan payments are triggered by the FSA-determined county price (explained below). 

For those who are “concerned” about small farmers, their crop yields are less likely to be highly correlated with the county yield.  If a farmer were to farm the entire county, then there is no difference between their enterprise unit yield and the county yield.  Nearly all farmers can cite cases where they received no ARC payments, but the county across the road did receive an ARC payment.  So as a replacement for put option price protection, ARC is a bit iffy, especially on small farms.  Again, any ARC payments are made only on 85% of the base acres, about a year after harvest, and subject to sequestration cuts, if any ARC payment is due.

Issue #4: Marketing Loans

At very low price levels, the FSA loan rate is effectively a free “put” on all farmer-produced bushels with no effective payment limit.  The current national loan rate for corn is $1.95 and $5.00 for soybeans, therefore the loan provides a “put” that has been way out-of-the-money for years.  Effectively, the loan rate on corn and soybeans provides a “put” with a near zero value.  However, the wheat national loan rate of $2.94 did trigger in Kansas and many other counties after the 2016 wheat harvest, and created an in-the-money “put”.  Note that the loan rate price is set by county.  Rather than requesting an FSA loan at the loan rate, farmers can elect to take Loan Deficiency Payments (LDP).  An LDP payment is the difference between the loan rate and the FSA-determined Posted County Price (PCP).  The PCP is a daily USDA price and is not the same as the NASS MYA price. 

Most farmers just claim the LDP, but farmers can take a loan on all harvested bushels at the county loan rate price.  Unlike a put where farmers pay premium for a CME put, farmers can take the loan and receive cash.  They will receive the loan in cash and at the end of 9 months they can pay off the loan at the lesser of the PCP or PCP plus interest, keep the difference, and avoid the payment limit.  Farmers have the option to pay the loan off early.  This is a non-recourse loan, therefore at the end of 9 months, farmers can forfeit the grain to the government and keep the loan proceeds.  Most farmers don’t forfeit grain because they gain more by repaying the loan at a PCP price that is normally lower than the loan rate.  The loan gain, similar in concept to loan right down, will approximately equal to the LDP.

The loan puts a price floor in the market for farmers, but not the market.  Because farmers can pay the loan off at the PCP, the farmer’s minimum price is the loan rate, but the cash market can still go lower and did on 2016 wheat.  There were days when the Kansas LDP wheat payment was over 40 cents a bushel.  During this period the loan rate was providing a deep in-the-money free “put” and was in direct competition with CME traded puts.

In most years, the LDP payments are not a factor.  The corn and soybean loan rates are so far out-of-the-money and provide almost no competition with CME traded puts.  The only recent exception was 2016 wheat when the LDP did trigger on wheat in many counties.  When prices are near the loan rate, there is no reason farmers would purchase puts when they are effectively receiving “free” puts from FSA.

Issue #5: Whole Farm Crop Insurance (WRCI)

WFCI contracts are whole-farm insurance with RMA premium discounts and guarantees based the farm’s prior 5 years of tax return incomes.  The WFCI should not be used by farmers that use CME traded futures and options, because the gains are not counted in the historical 5 years of income that set the guarantee.  However, hedging losses in one’s brokerage account are not included in a claim settlement, resulting in a lower indemnity payment.  WFCI insured farmers who want to manager some of their price risk will need to use derivatives offered by elevators such as forward contracts. 

One should not rule out the possibility that a WFCI insured farmer could set up a separate LLC organization to hold one’s futures trades and remove those trades from the farm tax return.  This would require professional help from an attorney and tax accountant to keep futures gains-losses separate from farm income.  This is another example of government policy generating unintended consequences.

The CME could argue the WFCI provides direct competition for their farmer customer who uses private tools to manage price risk.  However, at this point, WFCI has been sold mostly to farmers growing crops that are not traded on the CME or in locations where the price basis is unpredictable, providing another example of why it is important that convergence occurs and gives some predictability to the cash basis.

Conclusions

FSA’s PLC and Marketing Loans provide direct competition with CME-traded puts WHEN markets are extremely low.  However, currently the “strike” for these program are low enough that the “put” protection is way out-of-the-money for corn and soybeans, but these USDA programs have provided recent “put” protection on wheat.     

Revenue insurance and ARC provide limited competition with CME traded puts, but currently these “put” derivatives are out-of-the-money on corn and soybeans.  If policy makers want to eliminate any “small overlap” with traded puts or the commodity programs, they would remove the “put” (revenue) from RP and retain the HPO.

The HPO is NOT competition with calls.  HPO turns the revenue insurance product into a yield guarantee only.  When HPO triggers, the RP is the same guarantee as YP, but YP indemnifies the lost bushel at a below-market price while RP indemnifies the lost bushel at the current market price.  As a result, RP is a complement to futures because it maintains the hedge on forward-priced bushels.  Both YP and RP contracts require a yield loss greater than the yield guarantee to trigger any payments.

 

KSU Ag Econ “Wheat Market Outlook for 2018” Presentation

Following is a presentation on “Wheat Market Outlook for 2018”.  This information was given as part of a larger “Grain Market Outlook for 2018” presentation given by Kansas State University Extension Agricultural Economist Daniel O’Brien at a Farming for the Future meeting in Pratt, Kansas on December 14, 2017.

Additional Farming for the Future conferences in Kansas are planned for December 19th in Salina, January 10th in Scott City, and January 11th in Emporia.  Registration information can be found at the following web address:

http://www.agmanager.info/events/farming-future

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The full “Grain Market Outlook for 2018” presentation is available online at the KSU AgManager website at the following web address:

http://www.agmanager.info/sites/default/files/pdf/AGEC520_GrainOutlook_10-19-17.pdf

Information on Corn, Grain Sorghum, Soybean & Cotton supply-demand and market outlook is be provided in companion posts.

Following is information on “Wheat Market Outlook for 2018”:

KSU Wheat Market Outlook in Early-September 2017 – Possible Alternative Wheat Market Outcomes

An analysis of U.S. and World wheat supply-demand factors and 2017-2018 price prospects following the August 10, 2017 USDA Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports, and the market actions that have followed those reports are available on the KSU AgManager website (http://www.agmanager.info/).

Following is a summary – with the full analysis-article for Wheat to be found at this web location:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter/wheat-market-outlook-early-september-2017

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Summary

Wheat Market Response Following the August 10th USDA Reports

Since the USDA’s August 10th World Agricultural Supply and Demand Estimates (WASDE) report, CME DEC 2017 Kansas HRW Wheat futures initially traded lower through late August, then higher into early September.  DEC Kansas HRW wheat futures opened at $4.92 on 7/12/2017 – the day of the report – but closed lower to $4.75 ¾ that day.  Since then, DEC 2017 HRW wheat futures traded as low as $4.20 on August 29th, but have since moved higher to close at $4.55 on September 5, 2017.

The low end of wheat cash prices on 9/5/2017 in southwest Kansas are $0.20 higher than in central Kansas, and $0.40-$0.45 higher above marketing loan rates than in western Kansas.On September 5th Kansas cash wheat price terminal quotes in central and eastern Kansas ranged from $3.15 ($1.30 under DEC) to $3.65 ($0.80 under DEC) per bushel.  The Farm Service Agency (FSA) marketing loan rate in Saline County (Salina) in central Kansas for hard red winter (HRW) wheat is $3.07 per bushel – within $0.08 per bushel of the low end of the central Kansas cash wheat price range on 9/5/2017.   The high end of Kansas City, Missouri truck bids for Ordinary wheat were $3.69 ($0.50 under DEC).

In western Kansas, wheat elevator bids ranged from $3.35 ($1.10 under DEC) to $3.55 ($0.90 under DEC) per bushel.  The FSA marketing loan rate in Finney County (Garden City) in southwest Kansas for HRW wheat is $2.84 per bushel – $0.51 above the low end of the western cash wheat price range on 9/5/2017.

Key World Wheat Supply-Demand Findings in the August WASDE Report

For the “new crop” 2017/18 marketing year (MY) beginning on June 1, 2017 the USDA forecast that World wheat total supplies would be a record high 1,001.7 million metric tons (mmt) in “new crop” MY 2017/18 with total use of 737.05 mmt (2nd highest behind 739.3 mmt in “old crop” MY 2016/17).

World wheat exports are also projected to trend marginally lower to 179.9 mmt in the “new crop” MY 2017/18 – down from a record high of 182.3 mmt last year, but up from 172.9 mmt two years ago.

World wheat ending stocks are forecast to be a record high 264.7 mmt in “new crop” MY 2017/18 – up from the previous record of 258.6 mmt last year, and from 242.9 mmt two years ago.

Global wheat percent ending stocks-to-use (S/U) are projected to be 35.9% – up from 35.0% last year, and from 34.1% two years ago – rising to the highest level of World wheat supply-demand balances since 36.2% in MY 1999/00 and 36.5% in MY 1998/99.

Perspectives on Current World Wheat Stock Levels

For a perspective on how historically large World total wheat stocks and World wheat percent stocks-to-use now are, consider that 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 2007/08 marketing year was the last significant World wheat “short crop” marketing year to have occurred.  The “tight supply-demand” situation in MY 2007/08 compares to the most recent USDA projections of 264.7 mmt ending stocks and 35.9% ending stocks-to-use projected for “new crop” MY 2017/18.  The present “large crop-over supply” situation in World and U.S. wheat markets continues to have a prevailing limiting influence on U.S. and World wheat prices – even with recent drought-fueled moves higher in the market.

Large Black Sea Crops, Drought in HRS Wheat, & the “World-Less-China” Market Situation

There are at least three (3) key factors affecting World wheat markets at this time.

First, Increased production among major Black Sea Region exporters in “new crop” MY 2017/18 is at least temporarily “crowding out” export trade for other major exporters – including the United States.  Combined wheat production in Russia, Ukraine and Kazakhstan of 118.0 mmt in “new crop” MY 2017/18 is up 3.2% from 114.3 mmt in “old crop” MY 2016/17, and up 15.6% from 102.1 mmt in MY 2015/16.

Wheat production from these three countries amounts to 15.9% of World production in “new crop” MY 2017/18, and 15.1% one year and 13.9% two years ago.  In comparison, combined exports from these same three countries is projected to be 55.0 mmt in “new crop” MY 2017/18 (30.6% of World exports), up from 52.6 mmt a year ago (28.9% of World exports), and 50.3 mmt two years ago (29.3% of World exports).

Second, while there are plentiful aggregate supplies of wheat available in the World market, the available supply of high protein milling wheat is typically less so.  This situation had been exacerbated earlier this year by drought conditions occurring in U.S. and Canadian Hard Red Spring (HRS) wheat production areas.  These drought conditions had raised the demand and price premiums offered for high protein wheat supplies – whether they are from hard red winter wheat supplies or elsewhere.   However, with recent reports show less impact of dry conditions on 2017 North American Hard Red Spring Wheat production than expected, wheat protein premiums declining sharply in recent weeks.

Third, while the aggregate supply of wheat in World markets has grown, the supply of wheat from a “World-Less-China” perspective is projected to have actually “contracted” or “diminished” further in “new 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 U.S. wheat cash prices averaged $5.70 /bu.  It seems likely that this “China supply isolation factor” eventually will lead to noticeably tighter global supplies of available-exportable wheat sometime in the next 1-2 marketing years – brought on by the inability of buyers to secure needed supplies without having to bid prices at least moderately higher in export markets.

USDA U.S. Wheat S/D Forecast for “New Crop” MY 2017/18

The USDA released their wheat production, supply-demand and price projections for “new crop” MY 2017/18 in the August 10th USDA Crop Production & WASDE reports.

United States’ wheat plantings continue to be projected to be 46.657 million acres (ma) – down from 50.154 ma in “old crop” MY 2016/17 to the lowest level since the early 1900s.  Harvested acres are forecast to be 38.115 ma (83.72% harvested-to-planted) – down from 43.890 ma a year ago.  The 2017 U.S. average wheat yield is projected at 45.6 bu/ac (down from 0.6 bu/ac from July), down from the 2016 record of 52.6 bu/acre.

Wheat production in the U.S. in 2017 is forecast to be 1.739 billion bushels (bb), down from 2.310 bb in 2016.  Projected “new crop” MY 2017/18 total supplies are 3.074 bb (down from 3.403 bb in “old crop” MY 2016/17), with total use of 2.141 bb (down 5 mb from July, and from 2.219 bb in “old crop” MY 2016/17).

The USDA projected “new crop” MY 2017/18 ending stocks to be 933 million bushels (mb) (vs 1.184 bb a year ago), with percent ending stocks-to-use of 43.6% S/U (vs 53.4% last year and 50.0% the previous year).  United States’ wheat prices are projected to average $4.80 /bu ($4.40-$5.20 /bu) – up from $3.89 in “old crop” MY 2016/17, but down from $4.89 /bu in MY 2015/16, and $5.99 /bu in MY 2014/15.   It is estimated by Kansas State University that these USDA projections for “new crop” MY 2016/17 have a 55% probability of occurring.

Four Alternative KSU U.S. Wheat S/D Forecast for “New Crop” MY 2017/18

To represent possible alternative outcomes from the USDA’s August 10th projection, four potential KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “new crop” MY 2017/18.

KSU Scenario 1) “Lower U.S. Production” Scenario (25% probability) assumes for “new crop” MY 2017/18 that the following occurs.  This scenario assumes that there will be 46.657 ma planted, 83.72% harvested-to-planted, 37.500 ma harvested, 44.0 bu/ac yield, 1.650 bb production, 2.984 bb total supplies, 975 mb exports, 150 mb feed & residual use, 2.141 bb total use, 843 mb ending stocks, 39.37% stocks/use, & $5.20 /bu U.S. wheat average price.

KSU Scenario 2) “Lower U.S. Wheat Exports” Scenario (10% probability) assumes the following for “new crop” MY 2017/18:  Production of 1.739 bb (same as the USDA), 3.074 bb total supplies, 800 mb exports, 150 mb feed & residual use, 1.966 bb total use, 1.108 bb ending stocks, 56.36% stocks/use, & $3.75 /bu U.S. wheat average price;

KSU Scenario 3) “Higher U.S. Wheat Exports” Scenario (5% probability) assumes the following for “new crop” MY 2017/18:  Production of 1.739 bb (same as the USDA), 3.074 bb total supplies, 1.200 bb exports, 150 mb feed & residual use, 2.366 bb total use, 708 mb ending stocks, 29.92% stocks/use, & $6.00 /bu U.S. wheat average price;

KSU Scenario 4) “Wildcard Foreign Events” Scenario (5% probability) assumes the following for “new crop” MY 2017/18:  Production of 1.739 bb (same as the USDA), 3.074 bb total supplies, less than 700 mb exports, 150 mb feed & residual use, less than 1.800 bb total use, more than 1.300 bb ending stocks, greater than 65% stocks/use, & less than $3.00 /bu U.S. wheat average price;

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Wheat Market Outlook for 2017-2018 @ the 2017 KSU Risk and Profit Conference, August 18, 2017

The following information on the “Wheat Sorghum Market Outlook for 2017-2018” was presented at the 2017 K-State Risk and Profit Conference in Manhattan, Kansas on Friday, August 18, 2017.

The full version of this presentation – with additional information not presented to the conference because of time constraints – is available online at the following web address:

http://www.agmanager.info/events/risk-and-profit-conference/previous-conference-proceedings/2017-risk-and-profit-conference

Following is the full “Wheat Market Outlook for 2017-2018” available at the 2017 K-State Risk and Profit Conference on Friday, August 18, 2017.

 

 

KSU Wheat Market Outlook in Mid-July 2017 – MY 2017/18 Wheat S-D and Price Scenarios with World Less China Estimates

An analysis of U.S. and World wheat supply-demand factors and 2016-2017 price prospects following the USDA’s July 12th 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/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 Response to the July 12th USDA Reports

Since the USDA’s July 12th World Agricultural Supply and Demand Estimates (WASDE) report, CME SEPT 2017 Kansas HRW Wheat futures have traded lower.  SEPT Kansas HRW wheat futures opened at $5.52 ¾ on 7/12/2017 – the day of the report – but closed lower to $5.38 ¾ that day.  Since then, SEPT 2017 HRW wheat futures have moved lower to a close of $5.02 ¾ on Tuesday, July 18th.

That same day Kansas cash wheat price terminal quotes in central and eastern Kansas ranged from $3.98 ¾ to $4.47 ¾ per bushel – with basis ranging from $1.04 under to $0.55 under SEPT 2017 futures.  In western Kansas, representative wheat elevator bids ranged from $4.05 to $4.34 per bushel – with basis ranging from $0.98 under to $0.69 under SEPT 2017 futures.  Although cash prices have improved considerably from fall 2016 when many wheat bids had fallen to marketing loan rates or lower, basis levels are still “wide and weak” compared to historic Kansas wheat basis historic patterns.

Key World Wheat Supply-Demand Findings in the July WASDE Report

For the “new crop” 2017/18 marketing year (MY) beginning on June 1, 2017 the USDA projected the following. First, that World wheat total supplies would be 995.9 million metric tons (mmt) with total use of 735.3 mmt – both marginally lower than the record high levels of “old crop” MY 2016/17.

Second, that World wheat exports will also trend marginally lower to 178.4 mmt in the “new crop” 2017/18 marketing year – down from a record high of 181.6 mmt last year, but up from 172.9 mmt two years ago.

Third, that World wheat ending stocks would be a record high 260.6 mmt in “new crop” MY 2017/18 – up from the previous record of 258.05 mmt last year, and from a previous record high of 242.8 mmt two years ago.

Fourth, that World wheat percent ending stocks-to-use (S/U) would be 35.4% – up from 34.9% last year, and from 34.1% two years ago – rising to the highest level of World wheat supply-demand balances since 36.2% in MY 1999/00 and 36.5% in MY 1998/99.

Perspectives on Current World Wheat Stock Levels

For a perspective on how historically large World total wheat stocks and World wheat percent stocks-to-use now are, consider that 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 2007/08 marketing year was the last significant World wheat “short crop” marketing year to have occurred.  The “tight supply-demand” situation in MY 2007/08 compares to the most recent USDA projections of 260.6 mmt ending stocks and 35.4% ending stocks-to-use projected for “new crop” MY 2017/18.  The present “large crop-over supply” situation in World and U.S. wheat markets continues to have a prevailing limiting influence on U.S. and World wheat prices – even with recent drought-fueled moves higher in the market.

Wheat Protein Supply Concerns & the “World Less China” Market Situation

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 typically less so.  This factor helps exports of U.S. Hard Red Spring (HRS) wheat (higher protein – good quality) relative to World wheat export competitors.  The drought conditions now occurring in the U.S. and Canadian hard red spring wheat producing regions has raised the demand and price premiums offered for high protein wheat supplies – whether they are from hard red winter wheat supplies or elsewhere.

Second, while the aggregate supply of wheat in World markets has grown, the supply of wheat from a “World Less China” perspective is projected to have actually “contracted” or “diminished” further in “new 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 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 in coming months, then it will likely have a significant positive impact U.S. wheat market prices in “new crop” MY 2017/18.

However, unless there is this 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.   Such disruptions elsewhere would likely cause the market to then focus on the limited availability of food quality wheat outside of China in the World market.   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.

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

The USDA released their wheat production, supply-demand and price projections for “new crop” MY 2017/18 in the July 12th Crop Production & World Agricultural Supply and Demand Estimates (WASDE) reports.

United States’ wheat plantings are projected to be 46.567 million acres (ma) – down from 50.154 ma in “old crop” MY 2016/17 to the lowest level since the early 1900s.  Harvested acres are forecast to be 38.115 ma (83.72% harvested-to-planted) – down from 43.890 ma a year ago.  The 2017 U.S. average wheat yield is projected at 46.2 bu/ac, down from the 2016 record of 52.6 bu/acre.

Wheat production in the U.S. in 2017 is forecast to be 1.760 billion bushels (bb), down from 2.310 bb in 2015.  Projected “new crop” MY 2017/18 total supplies are 3.084 bb (down from 3.403 bb in “old crop” MY 2016/17), with total use of 2.146 bb (down from 2.219 bb in “old crop” MY 2016/17).

The USDA projected “new crop” MY 2017/18 ending stocks to be 938 million bushels (mb) (vs 1.184 bb a year ago), with percent ending stocks-to-use of 43.7% S/U (vs 53.4% last year and 50.0% the previous year).  United States’ wheat prices are projected to average $4.80 /bu – up from $3.89 in “old crop” MY 2016/17, but down from $4.89 /bu in MY 2015/16, and $5.99 /bu in MY 2014/15.   It is estimated by Kansas State University that these USDA projections for “new crop” MY 2016/17 have a 50% probability of occurring.

Three Alternative KSU U.S. Wheat S/D Forecast for “New Crop” MY 2017/18

To represent possible alternative outcomes from the USDA’s July 12th projection, three potential KSU-Scenarios for U.S. wheat supply-demand and prices are presented for “new crop” MY 2017/18.

KSU Scenario 1) “5 Year Avg Yield” Scenario (20% probability) assumes for “new crop” MY 2017/18 that the following occurs.  This scenario assumes that there will be 46.657 ma planted, 83.72% harvested-to-planted, 38.115 ma harvested, 45.8 bu/ac 5-year average yield, 1.746 bb production, 3.030 bb total supplies, 975 mb exports, 150 mb feed & residual use, 2.146 bb total use, 884 mb ending stocks, 41.19% S/U, & $5.05 /bu U.S. wheat average price.

KSU Scenario 2) “Higher U.S. Wheat Exports” Scenario (20% probability) assumes the following for “new crop” MY 2017/18.  Planted acres of 46.657 ma are associated with 38.115 ma harvested, 45.8 bu/ac 5-year average yield, 1.746 bb production, 3.030 bb total supplies, 1.200 bb exports (due to foreign crop problems), 125 mb feed & residual use, 2.346 bb total use, 684 mb ending stocks, 29.16% S/U, & $6.00 /bu U.S. wheat average price;

KSU Scenario 3) “Short U.S. Wheat Crop” Scenario (10% probability) assumes the following for “new crop” MY 2017/18.  Planted acres of 46.657 ma, 83.72% harvested-to-planted, 38.115 ma harvested, 40.2 bu/ac low “crop stress” yield, 1.633 bb production, 2.917 bb total supplies, 975 mb exports, 125 mb feed & residual use, 2.121 bb total use, 796 mb ending stocks, 37.53% S/U, & $5.35 /bu U.S. wheat average price.