Wheat harvest
Cash wheat basis remains strong.

KANSAS CITY — Market analysts interviewed by Milling & Baking News suggested that barring a currently unexpected weather disaster in the Southern Hemisphere wheat-exporting countries, where harvesting already was under way, wheat futures may trade mostly sideways for the next several weeks or even the next few months. But as millers and bakers will attest, weak winter wheat futures and rangebound Minneapolis spring wheat futures did not translate into lower flour prices. In fact, pan bread flour and spring standard patent were priced about $3 a cwt higher than a year ago. Only in the case of soft flour were prices lower than a year ago.

The 2017 wheat crop is in the bin. At 1,741 million bus, it was 25% smaller than the 2016 outturn of 2,309 million bus and was the smallest all-wheat crop harvested since 1,606 million bus in 2002.

Winter wheat production in 2017 totaled 1,269 million bus compared with 1,673 million bus in 2016. It was the smallest winter wheat crop since 1,137 million bus in 2002. Production of spring wheat other than durum in 2017 was 416.2 million bus compared with 532.2 million bus in 2016. It was the smallest other-spring wheat crop since 388.9 million bus in 2002.

Because of the smaller crop, wheat stocks will be drawn down in 2017-18. The U.S. Department of Agriculture on Nov. 9 forecast the carryover of wheat on June 1, 2018, at 935 million bus, down 21% from the 2017 carryover at 1,181 million bus. At the same time, historically, a 935-million-bu carryover was viewed as more than ample and compared with 843 million bus as the recent five-year average carryover. The 2017 carryover was the outlier in the past few years being the largest carryover since 1,261 million bus in 1989.

Because of the smaller crop, wheat stocks will be drawn down in 2017-18.

Worldwide, wheat supplies have never been larger. The U.S.D.A. on Nov. 9 in its World Agricultural Supply and Demand Estimates report forecast world wheat ending stocks in 2017-18 at a record 267.53 million tonnes, up 11.92 million tonnes from 255.61 million tonnes in 2016-17, the current record. The U.S.D.A. estimated 2017-18 wheat production at 751.98 million tonnes, just 1.91 million tonnes shy of the record outturn of 753.89 million tonnes in 2016-17.

Importantly, the U.S.D.A. on Nov. 9 again raised its estimate of Russian wheat production in 2017 to a record 83 million tonnes. It has raised its forecast for the Russian crop each month since its initial forecast issued in May at 67 million tonnes. Russia was forecast to be the world’s largest wheat exporter in 2017-18 with the U.S.D.A. projection for that country at 33 million tonnes compared with the 27.2 million tonnes in exports forecast for the United States.

Milling & Baking Newsasked Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, and Steve Freed, vice-president of research, ADM Investors Services, whether there were any surprises in the U.S.D.A.’s November forecasts for U.S. and world wheat supply-and-demand.
Paul Meyers
Paul Meyers, vice-president of commodity analysis for Foresight Commodity Services

Mr. Meyers found it “mildly” surprising that the U.S.D.A. raised its forecast for 2017-18 U.S. wheat exports by 25 million bus, to 1,000 million bus. The U.S.D.A. attributed its revised export forecast to recent large sales of hard red winter wheat to Iraq.

“Export sales have not been all that strong recently,” Mr. Meyers said. “Last week, sales were above expectations, but there have been a number of weeks when they fell below expectations. The trade had expected the carryover number to remain pretty much the same, but as the U.S.D.A. raised its export forecast, it lowered its carryover projection by 25 million bus.”

What stood out to Mr. Freed was the U.S.D.A. forecast for Russian wheat production.

Steve Freed, ADM Investor Services
Steve Freed, vice-president of research for ADM Investors Services

“Many think the new estimate at 83 million tonnes may be too low, and the U.S.D.A. forecast for Russian wheat exports in 2017-18 at 33 million tonnes may be too low,” he said. “We hear the Russians plan to spend heavily on logistics and plan to increase their wheat production over the next few years to 100 million tonnes. This would put a lot of pressure on wheat prices. It also may mean we may not need as many acres in the United States as we planted this past year.”

Mr. Meyers pointed out the U.S.D.A.’s world wheat outlook forecast a fourth consecutive year of increasing world wheat ending stocks, which he said made it very difficult for wheat futures to rally.

Chicago and Kansas City wheat futures set new contract lows in November.

“I think we could retest those lows, and maybe go a bit lower, but probably not by that much,” Mr. Meyers said. “Most of the news on the 2017-18 marketing year is already in the market. The biggest uncertainty is the size of the Australian crop. They haven’t received very good rainfall, and some say the crop may be below where the U.S. is projecting (21.5 million tonnes). But generally, 2017-18 world wheat supply is known, and we know which countries will have supply to export. I think given the large U.S. and record world wheat ending stocks, the market is probably going to be trending sideways the next several months.”

Mr. Freed said there were three “schools of thought” on futures direction.

“First, fundamentally, there’s no reason for us not to trade lower,” he said. “We have too much wheat, and there’s no real weather issue so far for the 2018 global wheat crops. Second, the funds are short, perhaps 120,000 wheat contracts in Chicago. If you combine the short positions in all the wheat and corn futures and options, last week was the third most bearish ever. On the one hand, this makes the market susceptible to a bounce, but on the other hand, we don’t see a good reason for them to get out of those short positions.”

The “third school” looks to the outside markets, Mr. Freed observed.

“We have to watch the dollar, the money flow in and out of the energy markets, what the stock market is doing, things like that,” he said, pointing out commodity markets recently were strengthened by China’s announcement it may invest heavily on infrastructure in the next few years.

Chicago and Kansas City wheat futures trading near contract lows were only about 15c higher than a year ago. In contrast, Minneapolis spring wheat futures were trading about $2 a bu above a year ago. Spring wheat futures traded sideways through October, made a breakout above recent moving averages in early November before trending lower again in subsequent trading.

Chicago and Kansas City wheat futures trading near contract lows were only about 15c higher than a year ago.

The wide spread between Minneapolis futures and the winter wheat futures (around $2 a bu) reflected strong U.S. and world demand for high-protein wheat with supplies tightening in the United States and Canada because of smaller 2017 spring wheat crops in those two countries. Spring wheat also was in demand for blending because U.S. producers have harvested two low-protein hard red winter wheat crops in a row.

While Kansas City wheat futures hovered near contract lows, the cash basis on hard red winter wheat has soared to the highest levels since 2008. Mr. Freed said hard red winter wheat growers sold nearly all of their 2017 crop at harvest, and with Kansas City wheat futures so low, it was the cash basis that had the principal burden in originating wheat.

“What happened was we’ve had two years in a row of hard red winter wheat with low protein and just not good quality,” Mr. Meyers said. “Demand for protein and better quality is what has driven the basis to extremely high levels. It’s different from 2008, when the basis was driven higher by significantly lower stocks.”

Mr. Meyers pointed out the U.S.D.A. forecast the 2018 hard red winter wheat carryover at 461 million bus. In 2008, the carryover was only 138 million bus. With the exception of 2008, Mr. Meyers said he could find no other year in the past 25 when the cash hard red winter wheat basis was as high as it is today.

Mr. Meyers said he expects the cash hard winter wheat basis to weaken but remain historically strong for the rest of 2017-18. He suggested the basis on 12.6%-protein hard red winter wheat (at $2.35 a bu on Nov. 14) may decline and average $2 a bu in January-March 2018 and perhaps average $1.60 in April-June.

Hard red winter wheat chart

“People look at futures and say wheat prices are pretty low,” Mr. Meyers said. “That’s what people concentrate on. But then they look at flour prices and say, ‘Wow, where did that come from?’”

In the case of pan bread flour, the high prices reflect the historically strong cash hard winter wheat basis, and in the case of spring flour grades, Minneapolis spring wheat futures $2 a bu higher than a year ago was the culprit. Only in the case of soft flour pricing did low wheat futures make possible lower flour pricing than a year ago.

At this time of year, with the 2018 winter wheat crop planted and beginning fall growth, the market begins to trade its initial ideas on the outlook for the next crop year.

The U.S.D.A. won’t issue its estimate of how much winter wheat has been planted for harvest next year until January. But the market was beginning to trade its ideas.

Mr. Freed indicated he thought soft red winter wheat acres may be up about 5% to 10% this year amid favorable conditions. He said he expected hard red winter wheat plantings to be a bit lower than last year. He also said spring wheat plantings were likely to increase in 2018 because of relatively high spring wheat prices and last year’s small crop.

Mr. Meyers said he expected about 31.9 million acres to be planted to winter wheat for harvest in 2018, down about 2% from 32.7 million acres planted for harvest this year. The 2017 planted area, in turn, was the smallest since 1909.

“However, because there was a fair amount of abandonment because of drought in 2017 in some areas, I actually have harvested area for winter wheat in 2018 up 4% from 2017,” Mr. Meyers said. His forecast for winter wheat harvested area in 2018 was 26.4 million acres versus 25.3 million acres in 2017.

Winter wheat plantings chart

“Applying trend yields, I have winter wheat production for 2018 at just less than 1.3 billion bus, which would be up about 2% from 2017 but still down 23% from the 2016 crop,” Mr. Meyers said.

Mr. Meyers said he expected hard red winter wheat acres to decline about 2% from last year. His projection was for 23 million acres to be planted to hard red winter wheat compared with 23.4 million acres for 2017. Some analysts suggested there would be an even greater decrease in hard winter wheat planted area.

“I don’t think it will be down as much as other people may be thinking,” Mr. Meyers explained. “In 2017, acres dropped more than 3 million from the year before and were down almost 6 million acres from 2015. We’ve had a substantial decline in winter wheat acres in the last two to three years. And historically, when we’ve seen that, planted area tends to plateau for year or two for crop rotation and other reasons.”

Unlike Mr. Freed, Mr. Meyers said he expects soft red winter wheat planted area for 2018 to be about 5% smaller than in 2017 because soft red winter wheat growers have more choices on what to plant than do farmers across much of the hard winter wheat belt.

Mr. Meyers said growers may plant another 1 million acres to spring wheat for harvest in 2018 because of relatively strong spring wheat prices.

All-wheat acres may be up about 600,000 acres from 2017, and because harvested areas should be larger in 2018, all-wheat production may be up a couple hundred million bus from 2017, he said.

Both Mr. Freed and Mr. Meyers see a mostly sideways trade in wheat futures in the next several weeks.

Nearby wheat futures chart

Mr. Freed pointed out the July 2018 wheat futures were trading about 40c above nearby futures in Kansas City and Chicago and about 20c above the nearby futures in Minneapolis.

“I would think without a weather problem, the July contracts may come down to where the December contracts are,” Mr. Freed said. “Some really big bears think July 2018 wheat may drop below $4 a bu.”

Mr. Meyers expects sideways trading in futures, within 30c ranges, in the next four or five months. He said he expected K.C. nearby futures to average between $4.40 and $4.80 a bu with Chicago futures averaging about the same. He forecast Minneapolis nearby futures to average between $6.25 and $6.60 a bu. He said futures may weaken a bit as we approach next year’s wheat harvest, which more than likely will be larger than 2017.

Bakers for the past few months have steadily built fairly comfortable flour contract balances into 2018, and flour coverage for all grades was nearly 50% for January-March. But activity in flour markets seemed to have slowed in recent weeks, and millers and bakers were discussing options for pushing coverage forward.

Mr. Freed suggested bakers consider their approach to the cash wheat basis, particularly the cash hard red winter wheat basis. Deferred basis levels weren’t as high as the nearby, he explained. He said bakers may want to “nibble away” at the basis from now until the end of the marketing year just in case a tightening in supply delays a decline in the basis or even pushes it higher. From a futures standpoint, he added, when futures are in a carry, it’s often difficult to reach out and book something too far forward, especially should deferred futures begin to trend lower toward nearby values.

Nevertheless, if a baker can make a profit with May futures at $4.50 a bu, he should consider booking the flour, he noted. With regard to spring grades, Mr. Freed said he didn’t know how much lower from $6.50 a bu the Minneapolis July future might go, “but the closer we get to $6, you probably should book it just because we don’t know what the weather next year will be for spring wheat.”