Wheat production
With the supply side of the wheat supply-demand equation largely known for 2016-17, it seems only an export demand-driven surprise stood much chance of rallying U.S. wheat markets in the near term.

KANSAS CITY — As the 2016 winter wheat harvest was wrapped up and the spring wheat harvest approached the halfway mark, wheat futures were trading just above contract and 10-year lows. In recent weeks, Kansas City and Chicago wheat futures traded below $4 a bu for the first time since 2005 (the K.C. September on July 5 and the Chicago September on Aug. 2). Wheat futures were forecast to remain mostly range-bound near current levels in the next few months by analysts interviewed by Milling & Baking News. With the supply side of the wheat supply-demand equation largely known for 2016-17, and a large or even record large fall crop harvest set to begin, it seemed only an export demand-driven surprise stood much chance of rallying U.S. wheat markets in the near term.

Steve Freed, vice-president, ADM Investor Services, Chicago, said the reason for the plunge in wheat futures in the last several weeks was simple, “There’s too much wheat in the world. Wheat prices first were on the defensive because of the growing crop here in the United States and recognition the 2017 carryover may exceed a billion bus for the first time in decades. You also had 250 million tonnes of global wheat stocks in addition to 2016-17 production that had to find homes. Wheat had to try to become a feed grain globally, so it had to get to some kind of discount to corn. But we had rain in the Midwest this summer, and corn prices plunged, and wheat had to follow.”

The plunge was dramatic. September wheat futures set recent highs on June 8 at $5.11½ a bu in Kansas City futures, $5.33¾ in Chicago and $5.65¾ in Minneapolis. The futures since dropped to set multi-year lows at $3.99 in Kansas City, $3.99¼ in Chicago and $4.82 in Minneapolis (July 20), declines of $1.12½, $1.34½ and 83¾c a bu, respectively.

Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., Naperville, Ill., said, “This year’s U.S. wheat crop is turning out to be a lot larger than expected given the decline in acreage.” Mr. Meyers pointed out the U.S. Department of Agriculture in its Acreage report issued on June 30 estimated the area planted to all-wheat for harvest this year at 50.8 million acres, down about 7% from 54.6 million acres in 2015. The 2016 winter wheat plantings were estimated 7% below 2015, and the planted area of spring wheat other than durum was estimated 8% smaller than in 2015.

“The market was looking at this plantings decline of about 4 million acres (from 2015), and with average yields, initially determined wheat production this year should be lower than in 2015,” Mr. Meyers observed. “But from May to July, the U.S.D.A. raised its forecast for U.S. wheat production by 263 million bus, to 2,261 million bus, which would be up 10% from 2015. Most of the increase in the production forecast was in winter wheat, primarily hard red winter wheat.”

The U.S.D.A. in July indicated winter wheat yields in 2016 would set a new record at 53.9 bus per acre. The U.S.D.A. also forecast an average other-spring wheat yield at 46.5 bus per acre compared with 46.3 bus per acre in 2015.

“That increase in the production forecast surprised the market and continues to put downward pressure on prices,” Mr. Meyers said.

Since the U.S.D.A.’s July Crop Production report, the prospect for other-spring wheat yields may have lost some luster. The Wheat Quality Council spring wheat tour forecast an average other-spring wheat yield at 45.7 bus per acre, and expectations were the U.S.D.A. might trim its spring wheat yield forecast in the August report. Nevertheless, the 2016 all-wheat crop will be larger than anyone had reason to expect only a couple of months ago. And with the larger crop, even if the spring wheat production forecast is lowered, it was expected the U.S. 2017 wheat carryover would remain above 1 billion bus and the largest since 1988.

Mr. Meyers also pointed out the U.S.D.A. hiked its forecast for world wheat production from the May to the July World Agricultural Supply and Demand Estimates report. In May, the U.S.D.A. forecast world wheat production in 2016-17 at 726.99 million tonnes, just more than 7 million tonnes shy of the record 734.62 million tonnes in 2015-16. But by the July report, the U.S.D.A. had raised its world wheat production forecast to a record 738.51 million tonnes. If the U.S.D.A. forecast for a record world wheat crop this year were to be realized, world wheat production will have set a new record in each of the last four years.

In addition to a stronger U.S. wheat crop outlook, Russia and Ukraine production forecasts were raised from May to July. Russia in July was forecast to harvest a record 65 million tonnes of wheat this year. Last fall, when its winter wheat crop was planted in dry soil, ideas were the Russian 2016 crop might only reach 58 million tonnes, but well timed spring rains 
produced a remarkable turnabout.

Since the July reports, France reported a deterioration in its production prospects. Poor weather took a deep toll on the nation’s soft wheat yield forecast. As a result, the French agriculture ministry lowered its soft wheat production forecast to 29.1 million tonnes compared with 36.95 million tonnes as the previous projection. This reduction was expected to be reflected in the European Union production forecast in the U.S.D.A.’s August WASDE. But world wheat ending stocks in 2016-17, forecast at 253.7 million tonnes in July, likely will remain record large.

Asked what might rally U.S. wheat futures, Mr. Freed and Mr. Meyers agreed it may require a marked expansion in wheat exports.

“The European crop is a mess,” Mr. Freed said. “So you may have a situation where we may be competitive with the E.U. in both hard wheat and soft wheat. At the same time, our prices still are at a premium to those of Russia, and that country is going to have a record crop.” Mr. Freed said a stronger export outlook compared with the July forecast of 935 million bus for U.S. wheat in 2016-17 would be supportive but not necessarily a “game-changer” in view of huge U.S. and world wheat stocks.

Mr. Meyers said he earlier was skeptical of the U.S.D.A.’s July U.S. wheat export forecast, suspecting it was too high. With the French production shortfall and German quality problems, though, the export forecast seemed more realistic, he said.

Looking toward the end of 2016, wheat futures may derive support should growers decide to decrease winter wheat plantings because of weather or low prices. Mr. Freed noted meteorologists were forecasting warm and dry conditions across the southern Plains this fall.

“This might offer futures some support, and then we’ll see what happens down the road,” he said. “Regardless, we’re not talking about $4-a-bu wheat going to $6, were talking about $4 wheat going to $4.40 or something like that.”

Another supportive feature in the wheat market was the record short position held by traditional funds and speculative traders.

“You have to wonder how the long funds may remain record short wheat at these prices,” Mr. Freed said. “We’ve already seen some short covering because the market is oversold.”

At the same time, Mr. Freed said the funds would have to perceive a compelling reason to make a significant change in position.

Mr. Meyers commented, “If there is something that sparks a rally in wheat futures, and speculators opt to lighten the record short position, the rally could extend further than fundamentals might warrant.”

Neither Mr. Freed nor Mr. Meyers ventured to suggest short-covering in itself might spark a sustained rally in wheat futures.

Mr. Meyers indicated it was possible wheat futures may drop 15c to 20c below the contract lows in the near term but added that most bearish news relating to wheat directly already was priced into the market.

“We probably have not seen the lows in corn or soybeans, though,” he explained. “If their prices decline, particularly corn, they will be a drag on the wheat market.”

The U.S.D.A. in July forecast wheat feeding in the United States in 2016-17 at 300 million bus, more than double the 132 million bus fed in 2015-16 and the highest since 365 million bus in 2012-13. The U.S.D.A. may raise its forecast for wheat feeding in subsequent reports, but Mr. Freed noted “300 million bus” already was a large number. He said attempts to increase wheat feeding even in the Southwest have been frustrated partly because feedlot managers continue to prefer corn over wheat even when wheat is priced at a discount to corn.

Record yields across much of the hard red winter wheat belt resulted in a crop with historically low average protein. U.S. Wheat Associates in its Aug. 5 Harvest Report indicated the crop was averaging only 11.1% in protein compared with 12.3% in 2015 and 13.3% in 2014. Mr. Meyers said it primarily will fall to the cash wheat basis and not futures to sort out wheat distribution. At the same time, he noted many importers of U.S. wheat want the higher-protein hard red winter wheat, and there may be a slowdown in exports to some destinations if the United States isn’t able to supply what’s needed.

Mr. Freed noted the market had ample time to prepare for the low-protein hard red winter wheat crop. Bakers and other flour users who require a higher protein in their flour than can be provided by flour milled from hard red winter wheat alone have resigned themselves to increasing their use of hard winter-spring blends.

The soft red winter wheat cash market continued to exhibit wide regional variations. Unlike last year, though, the Central states crop had the best quality in 2016 while the Eastern crop, particularly the North Carolina crop, was much below average in quality. As a result, large Eastern mills reached out to the Central states for supply, keeping the cash wheat basis in both regions higher than it otherwise would have been.

Mr. Meyers forecast nearby wheat futures in the next several weeks to average $4.15@4.40 in Kansas City futures, $4.20@4.45 in Chicago futures and $4.70@5.05 in Minneapolis wheat futures.

Mr. Freed suggested there was no reason for nearby Chicago wheat futures to trade much below $4 nor much above $4.40 in the next several weeks.

Mr. Meyers said in consideration of the lowest wheat prices in 10 years, bakers should extend flour contract balances through the end of 2016 at minimum. He suggested wide carrying charges in wheat futures may be discouraging even more extensive coverage for many bakers.

Mr. Freed advised, “I would be covered through all of 2017. Look where prices are compared with 15-year charts, and remember, we’re only a drought away from wheat doubling in price.“

Plenty of corn all around

With the U.S. corn harvest under way across the South and just a few weeks away in key Corn Belt states, most expect the 2016 corn crop to be record large, resulting in ample corn supplies and weak prices. A record-large 2016-17 world corn crop also is forecast, which may add to woes for U.S. corn.

“The supply side has dominated the market,” said Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., 
Naperville, Ill.

Prospects for the 2016 U.S. crop have been favorable all season, since the U.S. Department of Agriculture’s June 30 Acreage report that forecast planted and harvested area both up 7% from 2015 and the third highest on record. But it’s yield that the trade has been watching, with nearly all analysts expecting an average above last year’s 168.4 bus an acre and some expecting a number at or above the record 171 bus an acre in 2014.

Much of the yield optimism is the result of weather cooperating better than expected in most areas, especially across the key Corn Belt states.

The U.S.D.A. rated the corn crop in the 18 major states at 74% good to excellent as of Aug. 7, slipping from 76% a week earlier but above 70% a year ago. It was the first decline in the combined good-to-excellent rating this season. Good-to-excellent ratings in the top two corn-producing states of Iowa and Illinois both were at 83% as of Aug. 7.

The key pollination phase (silking) was nearly completed at 97% on Aug. 7; kernels were filling with 53% of the crop in the dough stage compared with 42% as the five-year average; and 9% of the crop was maturing (dent stage), slightly behind 12% as the average.

While this story went to press before release of the key Aug. 12 U.S.D.A. Crop Production and World Agricultural Supply and Demand Estimates, reports with the first survey-based yield and production estimates of the season (see Late News on Page 1 for an update), there was little doubt in the trade the crop will be large. Wire service trade expectations last week averaged over 14.7 billion bus for production and near 171 bus per acre for yield, compared with 14.4 billion bus and 168.4 bus an acre in 2015.

In his Weekly Outlook on Aug. 8, University of Illinois agricultural economist Darrel Good noted the wide range of yield expectations in the trade, varying from 160 to 175 bus an acre.

“The market is likely trading a corn yield above 168 bus and near the high end of expectations,” Mr. Good said, noting that corn futures began dropping in mid-June.

December (new crop) corn futures last week were trading around $3.35 a bu ahead of the Aug. 12 crop report, after dipping below $3.30 a bu a week earlier and were down about 10% from a year earlier. Nearby September corn futures hit seven-year lows the prior week.

Mr. Meyers noted that corn futures turned lower earlier this year, with lows typically occurring after August once the crop size is better known. He said he expects December corn futures to trade in the $3.25-to-$3.35-a-bu range based on the U.S.D.A.’s July WASDE numbers (which used a trend yield of 168 bus an acre), but prices may fall to around $3 a bu if the Aug. 12 crop report numbers come in around the average trade forecast, and even to around $2.75 if the numbers are at the high end of trade expectations.

Globally, the International Grains Council on July 28 forecast world corn production at a record 365.2 million tonnes, up 6% from the 2015-16 estimate and up 1% from 361.1 million tonnes in 2014-15, the current record. Global ending stocks were forecast at a record 52.9 million tonnes, up 22% from 2015-16 and up 20% from 2014-15.

An added element to this year’s demand picture is the high level of feed wheat available both domestically and globally due largely to the low average protein of the hard red winter wheat crop in the United States and low wheat prices due to ample supplies globally.

“Cheap wheat may be one reason (corn) exports don’t expand more,” Mr. Meyers said. Domestically, he said feed use of wheat may be greater than the U.S.D.A.’s July WASDE forecast, but “you can’t feed all wheat,” even with cash wheat prices below cash corn prices in some areas. Most wheat is fed in the June-August quarter, shortly after the winter wheat harvest and before corn harvest.

Unlike wheat, which is being entered into the government’s loan program for the first time in years, corn prices remain above the loan rate of $1.95 a bu. That means low prices will have to attract domestic and export demand and that carryover stocks likely will build. In July, the U.S.D.A. projected Sept. 1, 2017, corn carryover at 2,081 million bus, the highest in more than a decade. That number may increase if 2016 production hits the level many in the trade expect.

Mr. Meyers noted that demand hasn’t been “all that bearish,” with 2016-17 (beginning Sept. 1, 2016) projections for feed use, exports and use for ethanol all up from the current year in the July WASDE report.