Bakers and other wheat end users have taken advantage of the lowest futures and flour prices in years to extend coverage.

KANSAS CITY — Wheat futures, having last week set new contract and multi-year lows in Kansas City and Minneapolis futures and trading not far above lows set in early September in Chicago, may decline further in the next several weeks, according to market analysts interviewed by Milling & Baking News. Bakers and other wheat end users have taken advantage of the lowest futures and flour prices in years to extend coverage, at the very least of the futures component of flour contracts, beyond what has been seen in recent memory.

When wheat futures set contract and multi-year lows in early September, it was widely thought futures had nowhere to go but up. That proved not to be the case as forecasts for the record world wheat crop were steadily raised, export demand for U.S. wheat plummeted and the outlook for the 2016 winter wheat crop began to improve, said Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., Naperville, Ill., and Steve Freed, vice-president, ADM Investor Services, Chicago.

Mr. Meyers said a new round of pressure on wheat futures began with a larger-than-expected decrease in the U.S. Department of Agriculture’s forecast for 2015-16 wheat exports. The U.S.D.A. on Nov. 10 lowered its export forecast by 50 million bus. At 800 million bus, exports in 2015-16 were forecast to be the lowest since 1971-72, or before the 1972-73 Soviet grain purchases that pushed U.S. wheat exports above 1 billion bus for the first time in history.

Mr. Meyers pointed out the U.S.D.A. forecast translated to a 6% year-over-year decline in wheat exports (U.S. wheat exports in 2014-15 were an anemic 854 million bus), but export wheat commitments for 2015-16 (exports and outstanding sales yet to be shipped) to date were running 17% behind the year-ago pace. This meant the pace of U.S. wheat exports would have to accelerate if the current forecast of 800 million bus is to be reached. In fact, the U.S.D.A. may have to reduce its export forecast in future supply-and-demand reports, Mr. Meyers suggested.

Militating against an expansion in foreign demand for U.S. wheat anytime soon were huge exportable supplies in the hands of the other major-exporting countries and the rising value of the dollar.

The U.S.D.A. forecast world wheat production in 2015-16 at a record 732.98 million tonnes. World wheat ending stocks in 2015-16 were forecast at a record 227.3 million tonnes. While the U.S.D.A. in November lowered its forecast for U.S. wheat exports in 2015-16, it raised its forecast for foreign wheat exports to 138.64 million tonnes from 137.44 million tonnes as the October outlook. The U.S.D.A. forecast the U.S. share of world wheat exports in 2015-16 at 13.5%, the lowest in records extending back to 1960-61. In contrast, the U.S.D.A. forecast the former Soviet Union’s share in 2015-16 world wheat exports at 28% and the European Union’s share at 21%.

Additionally, the value of the dollar is on the rise, which renders U.S. wheat offers less competitive in world markets, Mr. Meyers said.

“There is expectation that the Federal Reserve may raise interest rates in December,” he said. “Once the Fed raises interest rates, it typically raises them again in a few months. So not only is the dollar strong now, it may continue to strengthen.”

Because of the reduced U.S. 2015-16 wheat export outlook, and with other supply-and-demand forecasts unchanged from October, the U.S.D.A. raised its forecast for the carryover of wheat on June, 1, 2016, to 911 million bus, up 158 million bus, or 21%, from 2015. The forecast U.S. wheat carryover was the largest since 976 million bus in 2010 and would compare with the recent five-year average carryover at 733 million bus.

Mr. Freed said another key feature in renewed weakness in wheat futures was improvement of global weather.

“We had nice rain across the U.S. winter wheat area, and there have been rains across the former Soviet Union, especially Russia,” Mr. Freed said. “So, I think the market has relaxed from being concerned about dryness.”

The recent rain has resulted in a gradual improvement in U.S. winter wheat condition ratings as provided by the U.S.D.A. in its weekly Crop Progress reports.

Mr. Freed also pointed to a recent report issued by the Organization for Economic Cooperation and Development that pointed to outlooks for lower world trade in virtually all commodities.

“So if there are concerns about a possible world recession, and with the Fed talking about raising interest rates, you would want to sell commodities, not buy them,” he said.

Mr. Meyers said the U.S.D.A.’s higher-than-expected soybean and corn crop estimates, with soybean production setting a new record, and lackluster export prospects for the two crops, also exerted weight on wheat futures.

Mr. Freed and Mr. Meyers indicated wheat futures may go lower. Mr. Freed said the support level for Chicago wheat futures was $4.50 to $4.60 a bu, and if there is no weather problem, Chicago futures may drop to that level. Mr. Meyers said futures may decline 10@15c from current prices, to around $4.50 a bu in Kansas City futures, $4.70 in Chicago futures and $4.80 in Minneapolis.

Asked what might push wheat futures higher, Mr. Freed said, “Two things. No. 1 is weather, but November/December is the wrong time for a weather rally. You have a seasonal tendency for futures to bounce after the U.S. fall crop harvest, but there’s no reason for a bounce this year. And second, prices may rally if the world economy all of a sudden gets better.”

Mr. Meyers said prices may find support if other exporting nations indicate a significant portion of their exportable supply was already sold, which may bring some world demand back to the United States. Further ahead, eyes will be on the Winter Wheat Seedings report to be issued in January.

Mr. Freed said soft red winter wheat planted acres may be down 20% from last year, and 2016 spring wheat acres may be down 5% from 2015 with hard red winter wheat planted acreage little changed. A smaller wheat area may be supportive.

Mr. Meyers acknowledged a market consensus was forming around ideas winter wheat acres will be down from last year, but he said he had a different take.

“Planting conditions in the hard winter wheat states were better this year than last year,” Mr. Meyers said. “Many acres that weren’t planted last year were planted this fall. Soft red winter wheat area last year was the smallest in years in part because of the late fall harvest in 2014. Harvest weather was nearly ideal this year with corn and soybean crops taken out ahead of the normal pace. That may result in some additional soft red winter wheat acres.”

Mr. Meyers said winter wheat planted area may be up 1 million acres from last year.

Chicago wheat futures have been trading at a wide premium to Kansas City futures and for a brief time traded above Minneapolis futures. Explaining why, Mr. Freed said, “I think quality is the main thing. The quality of this year’s soft red winter wheat crop is not very good, so millers are reaching out for quality, and this might even make stopping delivery a viable alternative.” While delivery wheat allows up to 3 parts per million vomitoxin, for some millers, what’s available from producers and elevators in their regions may be even worse.

Mr. Meyers said quality was one reason Chicago futures were trading above K.C. futures. But there was another reason as well, and that was the depressed export market for hard red winter wheat. He pointed out hard red winter wheat export commitments were running 29% behind last year’s pace while soft red winter wheat export commitments were running about 22% behind.

Mr. Freed noted bakers held the best forward coverage they’ve had in years.

“It never hurts to lock in a positive margin,” he said.

Mr. Meyers agreed, especially with regard to bakers using hard wheat flour.

“There has been aggressive forward coverage on futures, perhaps not as far out for flour itself given millfeed and basis values,” he said.

Mr. Meyers pointed to futures coverage that for many bakers extended six and even nine months compared with a more normal three months.