Spring wheat prices move skyward on supply outlook
(World-Grain.com, February 08, 2008)
by World Grain Staff
KANSAS CITY, MISSOURI, U.S. — Hard red spring wheat futures prices and cash wheat premiums in
Minneapolis skyrocketed in recent weeks on mounting concerns supply at least of quality wheat of that
class will be depleted before the 2008 crop begins to flow into marketing channels. The March future in
Minneapolis surged above $15 a bushel in trading last week, and the May future soared above $14,
levels never before seen in wheat. On Feb. 5, the Minneapolis Grain Exchange announced it would
expand daily trading limits effective Feb. 12 to 40Ά from the current 30Ά to accommodate the
phenomenal volatility. The Kansas City Board of Trade and the Chicago Board of Trade were discussing
following suit.
Record-high old-crop spring wheat futures prices thus far have failed to ration demand so stocks can be
stretched into the new marketing year. New crop wheat futures prices set record highs on Jan. 29 and
seemed poised to break through those levels. But it was uncertain whether new crop prices were high
enough to encourage producers to seed more spring wheat this year than in 2007.
The U.S. Department of Agriculture (USDA) on Jan. 12 forecast the carryover of hard red spring wheat on
June 1, 2008, at 88 million bushels, down 29 million bushels from the 2007 carryover of 117 million
bushels. It would be the tightest carryover of spring wheat since 87 million bushels in 1974. Most analysts
in the trade were confident on the basis of continued heavy demand for spring wheat, the USDA will lower
its carryover projection in the February report. One analyst even suggested a negative 2-million-bushel
carryover for spring wheat.
Additionally, a wheat carryover date of June 1 doesn’t reflect the reality of the spring wheat market as the
harvest in the northern Plains only gets under way in July and new crop spring wheat typically doesn’t
begin to flow into marketing channels until the last week of July or the first couple of weeks in August.
Compounding matters for wheat buyers have been cash wheat premiums well above historical averages.
The Minneapolis basis on 14% spring wheat was $4.25 over the Minneapolis May, a record premium
leaving the cash price for the benchmark for spring wheat at an eye popping $18.20 per bushel. The cash
wheat premium for 15% spring wheat was $5 over. By themselves, these premiums were higher than
typical cash wheat prices in recent years. For instance, the national average farm price for wheat in 200506 was $3.42 per bushel.
Meanwhile, futures contracts in Kansas City and Chicago last week posted limit-up gains in the wake of
the extraordinary strength in Minneapolis wheat. Still, Kansas City and particularly Chicago contracts
remained at gaping discounts to Minneapolis futures.
Skyrocketing cash prices for spring wheat have not yet put the brakes to foreign demand for U.S. spring
wheat. The USDA projected 2007-08 exports of hard red spring wheat at 275 million bushels, up 25
million bushels from the previous year. But as of Jan. 31, exports and undelivered sales of hard red
spring wheat for the current marketing year were 293 million bushels, 18 million bushels higher than the
USDA forecast, with four months remaining in the marketing year.
One miller expressed hope some foreign spring wheat buyers would sell back spring wheat cargoes and
substitute lower-priced hard winter wheat cargoes. But some exporters were doubtful.
For decades, a major outlet for U.S. spring has been Pacific Rim nations. Anyone expecting demand from
those customers to diminish in response to higher prices likely will be disappointed, said Thomas J.
Hammond, president, Columbia Grain International, Inc., Portland, Oregon, U.S.
"We can’t ration demand," Hammond said. "Our customers have some pretty inflexible requirements. If
there is any price rationing, it is going to take place in the U.S. first."
Hammond said he has been asked why private Philippine wheat buyers won’t sell back their spring wheat
purchases and use hard winter wheat instead.
"For one thing, the end users there like spring wheat," he said. "That’s what they want. Even if end users
were willing to switch wheat class in exchange for a lower price, it would be very difficult for Philippine
flour millers to unwind what they’ve already programmed. They purchase combination cargoes with white
wheat, hard winter and spring wheat in different holds. To unwind something like that is easier said than
done."
Recognizing tightness in U.S. spring wheat supplies, foreign buyers such as the Philippine flour millers
have accelerated their buying programs for the current marketing year, Hammond said. Still, none of the
major importing nations of Asia — the Philippines, South Korea, Japan and Taiwan — has yet covered
requirements for the summer, when U.S. spring wheat supplies were expected to be desperately tight.
While Asian wheat buyers have been inflexible with regard to buying spring wheat, there has been some
easing in rigidity with regard to specifications, Hammond said. Certain buyers that traditionally tender for
14.5%-protein hard red spring wheat were considering lowering protein specifications to 14%. Other
quality compromises may be required in the months ahead, he said.
Hammond said tightness in U.S. wheat supplies was becoming a greater concern abroad.
"I have three guys from a Japanese television crew standing next to my desk right now, and it’s what they
want to talk to me about," he said. "I don’t know what happens next. We’re in uncharted territory."
Unprecedented prices also have not adequately rationed domestic demand for spring wheat even with
widespread substitution of high-protein hard red winter wheat for spring wheat by mills across the country.
High-protein hard winter wheat was trading at rapidly widening discounts to spring wheat of the same
protein. Bakers and millers were working together to change formulations of products to accommodate a
higher percentage of hard winter wheat compared with spring wheat in blends, and some formulas calling
for blends were being shifted to hard winter wheat only. One miller described the shift to hard winter
wheat from spring wheat as a "mad rush."
At the same time, some baked products — hearth bread, hard rolls, bagels and other specialty items —
require flour milled from high-protein, high-gluten spring wheat. Bakers of these products had little or no
flexibility with regard to substituting hard winter wheat for spring wheat. Their pressing needs were
reflected in the recent widening in the spread between cash premiums on 14% protein spring wheat and
15% protein spring wheat
Supply of high-protein hard red spring wheat was diminishing rapidly. U.S. hard red spring wheat
production in 2007 totaled 449 million bushels, up 4% from 432 million bushels in 2007. Both the 2007
and 2006 crops had outstanding quality and were graded No. 1 dark northern spring. But only 43% of the
2007 crop had protein of 15% or more, whereas 48% of the 2006 crop had 15% protein or more. Stated in
bushels, about 193 million bushels of the 2007 crop had protein of 15% or more, while 207 million
bushels of the smaller 2006 crop had protein of 15% or more.
Most spring wheat already was in commercial hands. A Minneapolis grain merchant said a survey of
northern Plains elevators indicated between 85% and 95% of the 2007 spring wheat crop in their
territories already was sold by producers. The little wheat still owned by producers might not move until
the new crop is planted and farmers have some confidence in 2008 production prospects, the merchant
said. So there was no expectation farmer selling would bring noticeable pressure on the futures or cash
markets in the near term.
While mills have maintained near-term pipelines in good order, offers of spring wheat for April-July were
scant. It has been exceedingly difficult for mills to cover their summer needs, the Minneapolis grain
merchant said.
Erica Peterson, marketing specialist for the North Dakota Wheat Commission, said she doubted spring
supplies would be depleted before new crop, but that applied to undifferentiated spring wheat. Spring
wheat supply with particular qualities and characteristics could indeed run out.
Those looking to Canada for rescue were confounded by a Statistics Canada estimate of Dec. 31
Canadian wheat stocks that fell well below expectations. Statistics Canada on Feb. 5 estimated Canada’s
stocks of wheat excluding durum at the end of 2007 at 12,278,000 tonnes, down 5,223,000 tonnes, or
30%, from 17,501,000 tonnes a year earlier. The recent five-year average Dec. 31 stocks of wheat other
than durum was 15,053,000 tonnes. Commercially held wheat stocks were estimated at 3.1 million
tonnes, down 14% from the end of 2006.
"There has been some wishful thinking that the Canadians will bail us out," Hammond said. "But the
Canadians haven’t been selling, and the Statistics Canada numbers explain why — stocks are low there,
too."
The USDA on Jan. 12 projected U.S. imports of Canadian spring wheat in 2007-08 at about 37 million
bushels, down from 50 million bushels in 2006-07.
As if spring wheat users didn’t have enough to worry about, a new source of domestic demand has
emerged: pasta manufacturers. Pasta makers not specifying their products are made of 100% durum
semolina always were free to request a blend of durum and spring wheat. But with durum selling at an
astounding $24 a bushel, spring wheat even at record prices seemed alluring. The result has been an
increase in blending spring wheat with durum for a number of pasta products, with individual products
shifting to spring wheat only.
With old crop spring wheat supplies so tight and wheat prices so high, it would be normal for the market
to anticipate an expansion in plantings for the new crop spring wheat harvest. But no such expansion
seemed certain this year. All hinged on price movements of new crop spring wheat relative to those of
several alternative crops, including corn and soybeans, durum and sunflower.
Producers in the Red River Valley of North Dakota and Minnesota have up to 10 crops from which to
choose for planting. Farmers will determine what to plant with calculators in hand. In western areas,
where durum and spring wheat are grown side by side, durum prices nearly double those of spring wheat
could prove compelling. Peterson said durum plantings could expand 10% or even 20%, and this
primarily would be at the expense of spring wheat.
The Minneapolis grain merchant said he was on the fence with regard to projecting spring wheat
plantings. He pointed to private estimates calling for a smaller area planted to spring wheat this year. In
addition to comparing input costs and prospective revenue per acre likely to be afforded by the competing
crops, producers also had lingering concerns over variability in yield and quality seen in spring wheat in
many years.
"We need unchanged to more acres and better yields to even hope we’ll be able to begin rebuilding
stocks in 2008-09," he said. The USDA will issue its Prospective Plantings report on March 31. But the
report will be based on a survey conducted during the first two weeks in March, and minds can change in
the northern Plains before farmers take to fields, which should keep the market on edge until more solid
harvested spring wheat acreage projections become available.