“The four key supply constraints: late harvest, farmer storage, market incentive for commercial storage and delays in rail transportation, are not likely to be resolved until the end of the first quarter of 2015,” Rabobank said concerning corn and soybeans in its latest Agri Commodity Markets Research report.
While each market has developed its own patterns this year, one thing most analysts agreed on is that season lows were set in late September-early October for wheat, corn and soybeans. They also agreed that going forward, the key wild card is logistics, perhaps replacing weather as the historic trump card, although logistics certainly will be at the mercy of weather. Last week’s massive snowfall in western New York should have served as a wakeup call for the markets of weather’s potential fury.
The winter outlook at this point suggests colder-than-normal temperatures but perhaps less snow across the midsection of the country, which may bode better for rail transportation than last year, but severe cold also may slow rail performance.
The U.S. Department of Agriculture in its Nov. 10 Crop Production and World Agricultural Supply and Demand Estimates reports estimated combined wheat, corn and soybean production at a record 20,391 million bus, down slightly from 20,437 million bus estimated in October but up 5% from 19,418 million bus in 2013. Wheat production was estimated at 2,026 million bus, down about 10 million bus from the September U.S.D.A. Small Grains 2014 Summary due to resurveying because of late-harvested spring wheat and durum acres in North Dakota and Montana, and down 5% from 2,135 million bus in 2013. Corn production was estimated at a record 14,407 million bus, down slightly from October but up 3% from the prior record of 13,925 million bus in 2013. Soybean production was estimated at a record 3,958 million bus, up about 1% from October and up 18% from both 3,358 million bus in 2013 and the prior record of 3,361 million bus in 2009.
The wheat market has been a conundrum. U.S. 2014 wheat production was the lowest since 2011, but the world crop was record large at 719.86 million tonnes. U.S. wheat prices, especially cash basis levels, have been elevated by quality issues and higher rail freight rates that earlier pushed hard red winter and hard red spring basis levels to historic highs. As a result, U.S. wheat has struggled for months to be competitive on the global market, frequently losing out to wheat from the Black Sea region.
Despite lower U.S. wheat production from 2013, wheat futures prices also were lower, reflecting pressure from other grains and the large world crop. In mid-November, December wheat futures were down 13% to 15% from a year earlier for all three classes (Kansas City hard red winter, Chicago soft red winter and Minneapolis hard red spring.)
Flour prices, though, were a mixed bag, largely reflecting the impact of strong cash wheat basis levels, especially in hard red spring wheat. Prices of “cracker” flour milled from soft red winter wheat were down about 10% from a year ago in mid-November, bakers standard patent flour, mostly from hard red winter wheat, was down 7%, but spring standard patent flour from hard red spring wheat was up 6%.
Based on price movements in recent weeks, Steve Freed, vice-president, ADM Investor Services, Chicago, said flour buyers should have November-December coverage completed and should be about 50% covered for the January-March quarter if they took advantage of October lows.
The impact of higher freight costs, along with lower production and quality issues, was even more dramatic on prices of durum and semolina. Durum prices in mid-November quoted as delivered across the Chicago gateway were a nominal $20 a bu, more than double the $9.45 at the same time last year, while semolina was priced at $49.75 a cwt, 2.2 times the year-ago value. Trade sources indicated pasta makers may have about 65% of their first-quarter semolina needs covered as of mid-November, at only modestly lower price levels than nearby.
The U.S.D.A. on Nov. 10 forecast the carryover of wheat in the United States on June 1, 2015, at 644 million bus, down 10 million bus from the October projection but up 54 million bus, or 9%, from 590 million bus in 2014. The adjustment resulted from a 10-million-bu reduction in the 2014-15 wheat supply forecast to 2,785 million bus, which compared with 3,021 million bus in 2013-14. The lower forecast was attributed to a revised 2014 wheat production estimate at 2,026 million bus, down 9 million bus from October, due to resurvey of late-harvested acres, and down 109 million bus, or 5%, from 2,135 million bus in 2013.
The revised production estimate for hard red spring wheat was 556 million bus, down 5 million bus from September and compared with 491 million bus in 2013. The revised durum estimate was 53 million bus, down 4 million bus from September and compared with 58 million bus last year. The production estimates for the other wheat classes were unchanged with hard red winter wheat at 738 million bus (747 million in 2013), soft red winter at 455 million bus (568 million in 2013), and white wheat at 224 million bus (271 million in 2013).
Carryover adjustments by class were forecast for hard red winter wheat, hard red spring wheat and durum. The hard red winter wheat carryover forecast was raised 20 million bus, to 212 million bus, as the export forecast was lowered by 20 million bus, to 320 million bus. The hard red spring wheat carryover was lowered 30 million bus, to 217 million bus, as the 2014-15 export forecast was raised 20 million bus, to 280 million bus, and production and imports each were lowered 5 million bus. The durum carryover was forecast at 17 million bus, up 1 million bus from September, as the production forecast was lowered 4 million bus, to 53 million, and imports were raised 5 million bus, to 55 million bus.
The U.S.D.A. forecast 2014-15 U.S. wheat imports at 170 million bus (169 million in 2013-14), seed use at 76 million bus (77 million in 2013-14), food use at a record 960 million bus (951 million bus in 2013-14), feed and residual use at 180 million bus (228 million bus in 2013-14) and exports at 925 million bus (1,176 million in 2013-14).
Analysts generally saw the 2014-15 U.S.D.A. export forecast as too high with the current pace of exports insufficient to reach the projection. Wheat export sales for the season to date through Nov. 13 trailed the same period a year-ago by 26% and export shipments were behind by 33%, according to the U.S.D.A. But the U.S.D.A. also noted in its Nov. 13 Wheat Outlook that U.S. wheat exports were “front loaded” in the first half of 2013-14 and were expected to be “back loaded” this year, getting stronger as the year progresses, similar to the pattern in 2011-12.
“I see U.S. wheat exports about 50 million bus below the U.S.D.A. forecast,” said Paul Meyers, chief agricultural economist, Foresight Commodity Services. As a result, the 2015 carryover may be closer to 700 million bus than the 644 million bus forecast by the U.S.D.A. in November, he said.
Mr. Freed agreed on both counts, saying he expects 2014-15 U.S. wheat exports closer to 900 million bus (versus U.S.D.A.’s 925 million) and the 2015 carryover up about 50 million bus from the U.S.D.A.’s 644 million.
The U.S.D.A. in November narrowed its forecast for the average farm price of wheat in 2014-15 to $5.65@6.15 per bu from $5.55@6.25 a bu in October, compared with an average price of $6.87 a bu in 2013-14.
Mr. Freed said he expected wheat futures prices to trade about sideways from current levels in the first half of 2015, although freight issues would remain supportive to cash wheat basis levels.
Mr. Meyers said wheat futures prices were “on the high side” currently, and he expected some weakness in the next three to four months.
“I expect Kansas City wheat to average between $5.55 and $5.95 a bu over the next four months,” Mr. Meyers said, “with Chicago wheat averaging $5.10 to $5.50 and Minneapolis $5.50 to $5.90.” Kansas City March wheat closed at $5.89¼ a bu on Nov. 19, Chicago March wheat at $5.41 a bu and Minneapolis March at $5.78 a bu.
The large world wheat crop and low prices will continue to challenge U.S. wheat in coming months, the analysts said.
“World wheat stocks still are large,” said Mr. Meyers, “and U.S. hard red winter carryover for 2015 is significantly higher than the past year.”
The U.S.D.A. on Nov. 10 estimated the 2014-15 world wheat crop at a record 719.86 million tonnes, down 1.26 million tonnes from its October estimate but up 5.12 million tonnes, or about 1%, from 714.74 million tonnes in 2013-14, the prior record. World exports were estimated at 154.92 million tonnes, down 10.89 million tonnes, or 7%, from 2013-14. But the U.S. share of this year’s exports is expected to be 16.2%, down from 19.3% of last year’s larger global trade volume.
The United States has been shut out of many, if not most, foreign tenders in recent months, as some traditional buyers, such as Egypt, have favored lower-priced wheat from the European Union, Russia or Ukraine. In fact, combined exports from Russia and Ukraine in 2014-15 were estimated at 32.5 million tonnes, up 15% from 2013-14 despite worries about export interruptions that may result from tensions between the two countries.
For 2015-16, the U.S. winter wheat crop was going into dormancy in great shape from a moisture perspective. But the concern this fall has been potential damage to later planted wheat from extreme cold in November, although crop observers agreed it will be March before it can be determined if the crop sustained any damage.
The winter wheat crop in the 18 major states was rated 60% good to excellent on Nov. 16, compared with 63% at the same time last year. While the soil moisture profile across the hard red winter wheat region was considered better than in recent years, good-to-excellent ratings across the region varied by state with Kansas, Oklahoma and South Dakota ratings below those of a year ago but Texas, Nebraska and Montana ratings above and Colorado ratings even with a year ago.
Market watchers will keep a close eye on weather and logistics as winter approaches. At least the “surprise” effect of mounting logistics issues that hit the markets about this time a year ago should be less of a factor this year. Several flour mills, especially in the eastern half of the United States, have filled storage bins with additional inventory should rail performance slow arrival of wheat. Last year, several mills had to shut down temporarily for lack of wheat, or lack of rail cars to ship out flour. Still, effects of potential delays may be significant should the winter again turn harsh.
