V.S.R. adds uncertainty to already treacherous cash hard red winter wheat market 

The impending start to the variable storage rate (V.S.R.) mechanism for the Kansas City wheat futures contract may add another layer of uncertainty for those navigating the complexities posed by an historically strong cash hard red winter wheat market.

The cash hard red winter wheat basis has held stubbornly at the highest levels since 2008. In that year, both cash wheat premiums and wheat futures surged because of sharp reductions in U.S. and world wheat production and supply. This year, the cash hard winter wheat basis reflected the shortfall not of wheat in general — supplies are more than adequate in the United States and record large worldwide — but of wheat with the protein and quality the domestic market and quality-conscious foreign buyers require.

The adequacy of U.S. and world wheat supplies overall was reflected in winter wheat futures declining steadily in the past several weeks to set a series of new contract lows. Toward last week’s end, Kansas City nearby wheat futures traded below year-ago levels despite the 2017-18 hard red winter wheat supply being 12% smaller than the 2016-17 supply. Minneapolis spring wheat futures have dropped as well and were trading at the lowest levels since early June.

The primary feature propelling the cash hard red winter wheat basis to historically high levels was the harvest of two consecutive low-protein crops. Across broad expanses of the hard winter wheat belt, there simply was little wheat with protein high enough to meet minimal milling and baking requirements. In areas where there was wheat with middle or even high protein, much of the supply from the 2018 crop had subpar quality.

The cash hard red winter wheat basis as posted in Kansas City reflected the value end users placed on protein with 13%-protein hard red winter wheat premiums quoted 45c a bu higher than 12% protein, $1.10 higher than 11% protein and a whopping $2 higher than ordinary wheat. The spread between premiums on 11%-protein hard red winter wheat and ordinary wheat was a daunting 90c a bu and was a measure of just how much wheat with protein below 11% was thought to be held in store in the country.

The value of protein also was reflected in the spread between Minneapolis spring wheat futures and Kansas City futures, which was nearly $2 a bu.

Hard red winter wheat shipments were limited during the fall crop harvest and only now were beginning to accelerate. Delayed shipments of wheat for application against December and even late-November contracts finally were received.

At the same time, relatively wide carrying charges in K.C. wheat futures encouraged elevators and other country owners of wheat to store supply and not aggressively load it into the spot market. The cash wheat basis was elevated in an attempt to pry supply loose from the firm country hands.

That’s where the V.S.R. comes in. When wheat supplies are adequate or even ample, carrying charges in wheat futures typically are wide. Currently, seasonal storage rates equating to 6c a bu per month apply to hard red winter wheat. Should the current March-May futures spread at around 13c a bu be sustained through the Dec. 19-Feb. 23 observation period preparatory to setting the storage rate under the V.S.R. on March 18, the storage rate may be raised to 8c a bu. This may help sustain a strong cash hard red winter wheat basis going forward as mills and exporters attempt to pull wheat into marketing channels from elevators seeking to reap maximum benefit from the carry.

A final ingredient for this “perfect storm,” as one wheat buyer termed the current cash hard red winter market, was the inability to use the delivery mechanism of the K.C. futures contract to procure usable wheat should that prove necessary. This was because wheat with protein below 11% and as low as 10.5% was deliverable, albeit with a discount. After two consecutive low-protein hard red winter wheat crops, most of the deliverable supply was likely to comprise wheat with protein too low to be of much use to the domestic market except as feed.