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:
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).