Outlook for wheat prices bearish through 2016-17, but then?

by Jay Sjerven
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Outlook for wheat prices bearish
Wheat prices may continue to hover near the lowest levels in a decade into 2017.

KANSAS CITY — As winter approaches, wheat prices remained under pressure from ample U.S. and record world wheat supplies. Wheat futures set new contract and multi-year lows on Aug. 31 and have failed to make a convincing breakout to the upside since. Wheat prices may continue to hover near the lowest levels in a decade into 2017, barring a currently unexpected severe adverse weather event in the United States or another major wheat-producing country, according to analysts interviewed by Milling & Baking News. At the same time, the outlook for 2017-18 is not as bearish as that for the remainder of the current year, which bakers may want to consider when deciding how far forward they may want to book flour in the coming weeks, the analysts observed.

Kansas City and Chicago wheat futures have remained range-bound since setting multi-year lows on Aug. 31. The K.C. March future has traded within a range from the contract low of $4.11½ a bu and a high of $4.45¼ registered on Oct. 20. The Nov. 15 close was $4.25½ a bu. The Chicago March future has traded within a range between the Aug. 31 low of $4.10¼ and the recent high (Oct. 14) of $4.45¾. The Nov. 15 close was $4.18¾. The Minneapolis March future outperformed the Kansas City and Chicago March contracts, advancing 49¾c from the Aug. 31 low of $4.90 a bu to a high of $5.30¾ on Oct. 14 before trending lower and closing on Nov. 15 at $5.18.

The recent relative strength in Minneapolis spring wheat futures versus the K.C. and Chicago contracts reflected a market response to weather damage to a portion of the Canadian spring wheat crop that, along with quality problems in wheat crops in some other major exporting countries, may increase world demand for high-quality and higher-protein spring wheat from the United States. Such demand would come at a time when among the U.S. wheat classes only hard red spring wheat was forecast to end the 2016-17 crop year with lower stocks than was the case in 2015-16. While the spread between K.C. and Chicago wheat futures has been narrow, Minneapolis futures have been trading from 90c to more than a dollar a bu higher than the winter wheat contracts.

Bearing down on all wheat futures was the overwhelmingly bearish wheat supply-and-demand outlook for the remainder of 2016-17. The U.S. Department of Agriculture on Nov. 9 raised its forecast for the carryover of wheat in the United States on June 1, 2017, to 1,143 million bus, up 5 million bus from the October projection and up 17% from 976 million bus in 2016. The 2017 wheat carryover was forecast to be the largest since 1,261 million bus in 1988. Record yields in 2016 resulted in an all-wheat crop of 2,310 million bus, the largest since 2,512 million bus in 2008.

The U.S.D.A. forecast 2016-17 world wheat ending stocks at a record 249.23 million tonnes, up 0.86 million tonnes from the October projection and up 8.2 million tonnes, or 3%, from 241.03 million tonnes in 2015-16, the current record. World wheat production in 2016-17 was forecast at a record 744.72 million tonnes, up 0.28 million tonnes from the October projection and up 9.24 million tonnes, or 1%, from 735.48 million tonnes in 2015-16, the current record outturn.

And the 2016-17 bounty showed signs of continuing with U.S. and world producers harvesting record corn and soybean crops.

Given the weight of this unprecedented grain supply, Steve Freed, vice-president, ADM Investor Services, and Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., Naperville, Ill., were asked what it would take to prod wheat futures to break out of their current ranges.

“I’m a little surprised the Kansas City market isn’t trying to find a bid given the dryness in the southern Plains,” Mr. Freed said. “Historically, farmers would much rather have rain in April than in November, but you need some rain to get the crop out of the ground.”

Mr. Freed said it seemed the market doesn’t yet care much about the dryness, although the current dry and abnormally warm weather pattern in the Southwest may continue through the winter.

“Given no relief in sight, you’d expect some kind of a weather premium, but so far, it’s been a nonevent,” Mr. Freed said.

Mr. Meyers also pointed to the expanding area of moderate drought across southwestern Kansas and to even drier conditions across parts of the Southeast. In southwest Kansas, soil moisture was being depleted, although at a state level, topsoil moisture as of Nov. 13 still was rated 63% adequate to surplus (57% a year earlier), and subsoil moisture was 71% adequate to surplus (54%).

Mr. Meyers pointed out Kansas crop condition ratings as of Nov. 13 remained above a year earlier. The U.S.D.A. rated the Kansas crop at 56% good to excellent as of Nov. 13, unchanged from the previous week and compared with 46% a year ago. Also, it was pointed out the 2016 Kansas crop, even with relatively poor condition ratings entering last winter, saw record yields at harvest because of outstanding spring weather.

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