Wheat futures range-bound despite expected smaller crop

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While U.S. and world wheat production was expected to be lower this year than last, U.S. wheat futures were viewed as range-bound and may even weaken.

NAPERVILLE, ILL. — While U.S. and world wheat production was expected to be lower this year than last, U.S. wheat futures were viewed as range-bound and may even weaken in coming weeks, said analysts interviewed by Milling & Baking News. The principal reasons for the current range-bound trading are large 2017-18 carry-in stocks forecast for the United States and a record world wheat supply projected to be on hand at the beginning of the new crop year. It seemed only a weather threat to the U.S. crop or to the crops of other major exporting nations could significantly rally wheat futures anytime soon, the analysts said.

The U.S. Department of Agriculture on March 31 forecast the area planted to wheat for harvest in 2017 at 46.1 million acres, down 4.1 million acres, or 8%, from 50.2 million acres in 2016. It would be the smallest area planted to wheat in the United States in records extending back to 1919. The winter wheat area seeded for harvest this year was estimated at 32.7 million acres, down 9% from 2016 and the second-lowest planted acreage on record. The U.S.D.A. also said producers intend to plant 11.3 million acres to spring wheat other than durum, down 3% from 2016. It would be the smallest area planted to other-spring wheat since 1972.

With the planted acreage for all-wheat down about 4 million acres from last year, the harvested acreage likely will be down a similar amount, said Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., Naperville, Ill. “In addition, we’re coming off a year, 2016, when we had exceptional yields, all-time high yields for winter wheat. We’re not likely to match last year’s record yields, so the combination of less harvested acreage and a return to trend yields will result in production this year dropping about 400 million bus from 2016.”

U.S. wheat production in 2016 was 2,310 million bus.

Mr. Meyers noted wheat plantings in the United States have dropped nearly 9 million acres in the last two years.

“I thought even a couple of years ago we might have been starting to level off on wheat acres, but with the decline last year (5 million acres), the winter wheat seedings for 2017 reported in January and now the planting intentions reported on March 31, I don’t know that we have seen the low in wheat acreage,” he said. “I wouldn’t be surprised if during the next couple of years wheat loses another 2 million or 3 million acres.”

Mr. Meyers said with corn and soybean yields rising noticeably over the last 10 years and with wheat yields increasing only modestly during the same span, “if you pencil out the returns of growing corn or soybeans versus wheat, the numbers still generally favor corn and soybeans.”

Steve Freed, vice-president, ADM Investor Services, Chicago, said despite so few acres planted to wheat in the United States this year, a smaller crop may not result in a dramatically lower 2018 wheat carryover compared with 2017 “because if the Black Sea has a good crop, the European Union has a good crop and Canada has a good crop, we’ll just move some of the export demand we gained this year to the other exporters.”

Both Mr. Freed and Mr. Meyers suggested the U.S.D.A. may raise its forecast for the carryover of wheat on June 1, 2017, currently at 1,129 million bus, which would be the largest since 1988. The quarterly Grain Stocks report issued by the U.S.D.A. on March 31 indicated March 1 stocks of wheat at 1,655 million bus, up 21% from a year earlier and above trade expectations. This suggested wheat feeding last summer fell below earlier estimates, which may result in the U.S.D.A. lowering its forecast for 2016-17 feed and residual use of wheat from the current outlook at 225 million bus. Also, U.S. wheat exports in 2016-17 may fall below the 1,025 million bus forecast.

Whether the U.S.D.A. raises its 2017 carryover forecast or not, the volume of wheat carried into the new crop year will be the largest in decades and will go a long way toward assuring ample, even if smaller, supplies in 2017-18 despite the expected sharp drop in production.

The U.S.D.A. estimated total wheat supplies in the United States in 2016-17 at 3,400 million bus (a carry-in of 976 million bus, a 2016 crop at 2,310 million bus and imports forecast at 115 million bus). Mr. Meyers said based on a carry-in of at least 1,129 million bus, a 2017 crop below 2 billion bus as suggested by the U.S.D.A. plantings estimates and imports of about 115 million to 120 million bus, the wheat supply in 2017-18 may be down about 200 million bus, or 6%, from the current year.

Mr. Meyers and Mr. Freed agreed U.S. wheat exports in 2017-18 may fall short of the total forecast for the current year because other exporting nations will have large crops, even if most are expected to have smaller harvests than in 2016-17. The European Union-28 stood out. Weather depressed yields and the quality of its 2016 crop, and the International Grains Council recently forecast E.U. wheat production to increase 4% this year and its exports in 2017-18 to increase 19% from the current year to about 30 million tonnes. Also, Australia will be marketing its record 2016-17 crop for the next several months in competition with new crop U.S. supplies.

Mr. Meyers said feed and residual use of wheat in 2017-18 also may be lower than in the current year because of an expected smaller hard red winter wheat crop and ample old crop corn supplies that will be available this summer.

Overall wheat disappearance in 2017-18 may be around 2.15 billion bus compared with a forecast 2.27 billion bus in the current year, Mr. Meyers said. In the end, he suggested the carryover of wheat on June 1, 2018, may be about 125 million bus lower than what will be seen in 2017. But that still would mean a 2018 carryover of more than 1 billion bus, roughly the equivalent of half a crop.

The U.S.D.A. will issue its initial forecasts for 2017-18 U.S. and world wheat supply and demand in its May World Agricultural Supply and Demand Estimates report. In the meantime, the I.G.C. already has issued its preliminary forecasts for the upcoming year. The I.G.C. forecast world wheat production in 2017-18 at 734.5 million tonnes, down 3% from a forecast record 753.7 million tonnes in 2016-17. It forecast the United States and Australia to see the widest production declines.

But even with the projected smaller world crop, the I.G.C. forecast 2017-18 world wheat ending stocks at 234 million tonnes, down just 5 million tonnes from the record 239 million tonnes forecast for the current year.

“Even though production this year is declining, U.S. and global supplies are still going to be very large,” Mr. Meyers said. “And I think the reason prices still could go down from here is that we still have the uncertainty about crop size. If the crop turns out with trend yields or a little better, both in the United States and worldwide, you’ll take the weather premium out of the market.”

Mr. Meyers said if good weather allows premiums to be taken out of the corn and soybean markets as well, there may be even greater pressure on wheat prices.

While the winter wheat harvest was several weeks away, what Mr. Freed called “multi-million-dollar” rains fell across parched areas of the Southwest in the last couple of weeks, and wheat condition ratings as published by the U.S.D.A. were on the rise. Weather will be a key driver in agricultural futures markets in the next several weeks, but the heavy rains washed away many of the worst worries for winter wheat.

“While I think wheat prices are going to come down from where they’re at today, I don’t expect them to fall to the levels we saw last year,” Mr. Meyers said. “The fact that supplies in the United States and the world will be smaller will keep prices from falling to last year’s levels.”

Asked for his forecast for wheat futures in the next several weeks, Mr. Freed said, “We’re in a pretty tight range. Many people think Chicago wheat may average $4.20 a bu between now and the fall, if there’s no weather problem. It seems a little early to break below $4, and there’s currently no reason to trade above $4.50. Still, it’s troublesome to see planted acres as low as they are. It doesn’t give you any comfort to know that if there is a weather problem, there’s not a lot of wheat out there.”

Mr. Meyers said the Kansas City July future may fall into the low $4-per-bu area, $4.10 or $4.15, during the next couple of months. He said Chicago futures may trade around those same levels. With Minneapolis futures currently trading near $5.40 a bu, Mr. Meyers said he expected that market to weaken but to a lesser degree than Chicago and Kansas City. He suggested the Minneapolis July may trade down to around $5.20 a bu.

Asked how bakers might want to respond to the current market, Mr. Freed said April-June flour coverage stood at about 60% with soft flour coverage a bit lower because of the relatively strong soft red winter wheat basis. July-September coverage was about 20% for hard wheat flour and a little less for soft flour. At the same time, some baking companies already have covered all or a portion of their flour needs through December.

“They don’t mind paying the carry because they can make a profit at these price levels, and they don’t want to be surprised some day with a weather problem,” Mr. Freed said.

He said there was no reason not to cover remaining flour needs through the second quarter of 2017 and increase July-September coverage to about 30% or 35% in fairly short order.

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