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

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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.

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

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

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

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

Following are key points from the  complete article.

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

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

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

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

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

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

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

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

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

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

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

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

Point #6) Wheat Protein Issues

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

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

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

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

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

Point #9) Rail Cost Differences by Type of Grain

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

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

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

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

Point #11) Other Topics Discussed

There was also extensive discussion of other issues such as:

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

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

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

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

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

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

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

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

 

 

 

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

An analysis of U.S. and World wheat supply-demand factors and 2016-2017 price prospects following the USDA’s April 11th Crop Production and World Agricultural Supply Demand Estimates (WASDE) reports, and the market actions that have followed those reports are available on the KSU AgManager website (http://www.agmanager.info/).

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

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

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Summary

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

World Wheat Supply-Demand

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

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

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

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

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

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

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

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

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

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

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

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

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

KSU Wheat Market Outlook in October 2016 – Strong U.S. Hard Red Winter Wheat Exports Provide a Positive Market Signal

An analysis of U.S. and World wheat supply-demand factors and 2016-2017 price prospects following the USDA’s October 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/wheat-market-outlook-october-2016

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Summary

Overview

Since the USDA’s October 12th Crop Production and World Agricultural Supply and Demand Estimates (WASDE) report, U.S. and World wheat futures market prices have traded higher – with CME DECEMBER 2016 Kansas HRW Wheat futures gaining approximately $0.25 per bushel through Thursday, October 20th.   Results of the USDA September 30th 2016 Small Grains Summary report were fully incorporated into the October USDA estimates.

For the “current crop” 2016/17 marketing year, the USDA projected:

1) World wheat total supplies of 984.1 million metric tons (mmt) and total use of 735.7 mmt – both at record high levels,

2) that World wheat exports are trending higher with 174.7 mmt in the “current” marketing year – up from 172.0 mmt last year, and up from 164.4 mmt two years ago,

3) World wheat ending stocks at a record high 248.4 mmt compared to 239.7 mmt last year, and 216.1 mmt two years ago, and

4) World wheat percent ending stocks-to-use (S/U) of 33.76% – up marginally from 33.69% last year, and from 30.60% two years ago – up to their highest level in 15 years (since MY 2001/02).

Perspective on Current “Large Supply – Low Price Scenario” vs MY 2007/08

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 128.0 mmt and at least a 57-year low in percent ending stocks-to-use of 20.8% S/U both occurred in MY 2007/08, the last major World wheat “short crop” marketing year.  The numbers for MY 2007/08 compare to projections of 248.4 mmt ending stocks and 33.8% ending stocks-to-use projected for “current” MY 2016/17.  The “large crop-over supply-low price” situation that now exists in World and U.S. wheat markets continues to have a strong prevailing negative influence on World wheat prices.

Positive Wheat Market Factors Not Necessarily Being Accounted for 

However, the broader large crop-over supply-low price” situation in the World wheat market may be “masking” or “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 may 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 are running ahead of the pace needed to meet USDA projections – raising the possibility of improved U.S. HRW prices in coming months – helped by both low prices and acceptable protein and quality.

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 actually “contracted” or “diminished” in “current crop” MY 2016/17 compared to a year ago – to the tightest supply situation since MY 2013/14.

Relying of Future Supply-Shortfalls to “Adjust” the Market

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 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 “moderating” in recent months – also is a serious negative factor that is limiting 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 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 50.154 million acres (ma) – down 4.845 ma (-8.8%) from 2015.  The USDA also forecast 2016 harvested acres of 43.890 ma which would be down 3.428 ma (-7.2%) vs 2015.  Based on record high 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 forecast to be 2.310 bb (vs 2.062 bb in 2015), with total supplies of 3.410 bb (up from 2.927 bb in “old crop” MY 2015/16), and total use of 2.272 bb (up from 1.952 bb in “old crop” MY 2015/16).

Given these numbers, the USDA projected “current crop” MY 2016/17 ending stocks of 1.138 bb (vs 976 mb a year ago), with percent ending stocks-to-use of 50.09% S/U (vs 50.0% last year and 37.2% the previous year).  U.S. wheat average prices are projected to be in the range of $3.50 to $3.90 (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 (1.125 bb vs 975 mb by USDA), and b) lower feed and residual use (240 mb vs 260 mb by USDA).

The resulting KSU “Higher Exports with Spring 2017 U.S. Wheat Development Problems” Scenario (20% probability) assumes for “current crop” MY 2016/17: 2.310 bb production, 3.410 bb total supplies, 1.125 bb exports, 240 mb feed & residual use, 1.008 bb ending stocks, 41.97% S/U, & $4.35 /bu U.S. wheat avg. 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, Moderately Higher Exports” Scenario (65% probability) assumes for “next crop” MY 2017/18: 47.624 ma planted, 41.696 ma harvested, 47.0 bu/ac trend yield, 2.063 bb production, 3.326 bb total supplies, 1.000 bb exports, 250 mb feed & residual use, 2.286 bb total use, 1.040 bb ending stocks, 45.49% S/U, & $4.10 /bu U.S. wheat average price; and

KSU Scenario B) “Lower Yield, Average Exports” Scenario (35% probability) assumes for “next crop” MY 2017/18: 47.624 ma planted, 41.696 ma harvested, 43.6 bu/ac lower yield, 1.914 bb production, 3.177 bb total supplies, 980 mb exports, 240 mb feed & residual use, 2.256 bb total use, 921 mb ending stocks, 40.82% S/U, & $4.50 /bu U.S. wheat average price.

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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:

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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.

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