As we discussed in our 2017 review of durum prices and market structure last week, there was
In this in-depth assessment of the 2018 durum market, we’re going to cover such things as,
• Dry durum areas (and the great acreage debate) going into 2018/19;
• If international durum demand is growing;
• North American durum ending stocks;
• Acreage debates in 2018/19; and
• When you should be selling durum in 2018 (and why!).
Right now, in our durum wheat factors page on GrainCents, we’re watching 6 different variables that we categorize as either bearish, bullish, or just noise for the complex.
If you’re wondering how we analyze things, you can easily read how we view and make sense of the grain markets here.
GrainCents durum wheat readers also see our sales position for 2017/18 old crop and 2018/19 new crop.
Let’s dig into what FarmLead is expecting this year for durum prices and what’s going to be influencing them.
BULLISH FACTORS FOR DURUM WHEAT
Dry Durum Wheat Areas Going Into 2018/19
2017 was certainly a drier year for most durum-wheat producing areas, especially those in the U.S. Northern Plains.
However, wheat is a weed!
And carryover from 2016/17 and larger-than-expected production in Western Canada seems to be making up for the lack of American production.
This doesn’t mean, however, that prices shouldn’t be higher! It’s just that the market doesn’t know what the soil moisture conditions are like for the 2018/19 growing season and so aren’t pricing any risk out yet.
More concretely though, the most bullish factor that could be driving durum prices is easily this lack of soil moisture.
As a rule of thumb, it takes about 10 inches of snow to produce 1 inch of water in the soil. While there have been some good dumps of snow in Western Canada and the Northern Plains, it’s not enough just yet.
Even with average snowfall this winter in the major spring wheat and durum-producing areas, it’s hard not to expect the “Farmers Worried About Lack of Soil Moisture” headlines in April and May. And these are the exact headlines that the speculators – Read: money managers and hedge funds – that are going to jump on to help drive Minneapolis spring wheat futures prices higher.
Note: while durum prices aren’t exactly correlated to spring wheat prices, there is a relationship there worth noting. This is especially significant in areas where durum OR spring wheat could be planted.
This creates an opportunity to sell on the rumour, and profit on the fact. The rumour in this scenario is the lack of soil moisture and the fact that things are usually blown out of proportion and it’s not as bad as it really is.
Maybe you don’t agree with this assessment, but just look to what durum prices did in July 2017. As concerns over durum production started to mount, prices started going up. And we saw some good sales on the FarmLead Marketplace in and around $10 CAD / bushel.
But it seemed like half the farmers I talked to were mentioning $20 CAD / bushel durum prices.
And then the prices started to pull back. And the fact was realized that things weren’t actually as bad as everyone was thinking.
Grain market psychology lessons aside, we continue to look at the dry conditions in 2018/19 as the strongest catalyst for a significant move in durum prices.
As a further bullish reminder, global durum production is roughly attributed to European and North American production (which includes Mexico to a certain extent). A blip in production – i.e. a harvest that is 1-2 million tonnes lower – can have a seriously bullish impact on prices.
North American Durum Supply
We know that there was a smaller durum crop in North America this year.
But when we look at all the demand factors, where should we end the year and how might this impact new crop, 2018/19 durum prices?
We know that Canadian durum production came in at a surprisingly-large 5 million tonnes. But carryout is still looking fairly tight.
Agriculture and Agri-Food Canada now expects Canadian durum stocks to end 2017/18 at 1.1 million tonnes, the lowest in 4 years. This is thanks to relatively strong expectations for Canadian durum exports of 4.8 million tonnes, but I do have some strong doubts about reaching this number (more on this later).
Regardless, with a stocks to-use ratio of 19%, a Canadian durum carryout would be a drop of nearly 70% year-over-year and 19% below the five-year average of 1.36 million tonnes.
The big difference here is that domestic use of durum in Canada is forecasted by Ag Canada to fall over 200% from last year to just 935,000 tonnes in 2017/18. Of course, last year’s record domestic use of nearly 2.5 million tonnes was largely attributed to almost 2.1 million tonnes going into feed markets.
Regardless though, last year at this point, just 128,200 had been attributed to domestic demand. So far, 354,000 tonnes have been counted towards the domestic column. That’s a 176% increase year-over-year!
My conclusion: This is certainly tighter dynamics in the durum marketplace and while exports are tracking similar to last year, the domestic use should be categorized as bullish.
In the United States, available durum wheat of the 2017/18 crop year is slated to come in at 28 million bushels (or just over 762,000 tonnes). Year-over-year, U.S. durum wheat ending stocks for 2017/18 will fall by 22%.
It’s clear what sort of negative impact a 50% smaller durum wheat crop in the US is having.
Should you combine U.S. and Canadian numbers, it appears that total North American durum wheat carryout for 2017/18 should come in just under 1.9 million tonnes.
This would be 53% lower than the 2016/17 number.
As noted, most of the decline is attributed to the Canadian market.
Sounds exciting in terms of the what the potential price could be if we stay this tight. But let’s first take into account the bearish factors that could limit upside.
BEARISH FACTORS FOR DURUM WHEAT
What International Durum Market?
With a smaller durum crop in North America, it’s would be widely expected that durum exports should fall.
How are things really doing though?
Currently, the UDSA is forecasting that American durum wheat exports should hit 20 million bushels for the 2017/18 crop year (or just over 544,000 tonnes). This would be would a 17% decline from 2016/17.
Thus far this marketing year, through December, 213,500 tonnes of US durum wheat has been shipped out. That’s tracking about 9% below 2016/17’s durum exports a year ago.
For Canada, durum exports in 2017/18 are pegged by Ag Canada at 4.8 million tonnes. This would be a 6% improvement from 2016/17 but just 2% above the five-year average.
Through the end of December, durum wheat exports are actually tracking 1% below 2016/17’s pace with just 1.59 million tonnes shipped out thus.
The slower pace could be attributed to the fact that Italy hasn’t bought any durum from Canada yet.
This is pretty significant considering that Italy, over the past five years, has accounted for 22% of Canadian durum wheat exports at nearly 1 million tonnes on average. Italy also accounts for over 70% of Canada’s durum exports to the European Union.
Simply put, without Italy, there’s less of an export market. This, obviously means less demand. Which, intuitively means less support for a stronger market structure and higher prices.
The buzz in the grapevine is that Japan and the United States are buying more Canadian durum wheat right now. After all, the USDA is expecting US durum imports to jump 50% from last year to 1.3 million tonnes in 2017/18.
Comparably, Morocco and Algeria have gotten a little friendlier with US durum and winter wheat sellers, as indicated by recent sale announcements.
Nonetheless, the lack of an Italian market for Canadian durum is pretty significant.
In the first quarter of 2018 we’ll be digging into this bearish factor a little more and keeping tabs on it going forward.
What Could Global Durum Acres Be in 2018/19?
After a smaller crop in North America, you’d think prices would jump a bit.
However, we haven’t really seen the price premium that most farmers have been expecting.
And this has an impact on expected acres for 2018/19.
In Europe, it’s estimated that farmers there will plant just under 7 million acres in 2018/19. Based on average yields, this would produce a 9-million tonne crop.
In North America, “What will 2018/19 durum acres be?” is still a very precarious question to be asking.
Well, we know that stocks are a bit tight. The bullish factors are clear: drier soil moisture conditions, tighter balance sheet, and increased domestic demand in Canada.
These all point towards some stronger prices. But the quality of the crop in Canada and the US is still pretty decent. And there’s a pretty heavy amount of it.
Thus, 2018/19 acreage could be a bit of a double-edged sword:
If we see limited moisture over the winter and into the spring, there could easily be many acres that just don’t get seeded.
If prices do go up in the first half of 2018, you’ll likely see guys trying to seed durum (but again, that moisture variable is the key factor to watch out for). If acres do increase, and Mother Nature provides us with a few healthy moisture events, those higher prices will evaporate.
Overall, we think durum acres will be up in North America. After all, in 2017, just 1.92 million acres were planted in the U.S. (-20% year-over-year) and 5.2 million were planted in Canada (-17% year-over-year).
With pulses losing favour because of negative price implications due to India import taxes, an easy crop to switch back over to for farmers in these areas would be durum.
Overall, while combined North American acreage topped 7.1 million acres in 2017, I think it could be closer to 7.5 million tonnes in 2018, broken down by roughly 5.5 million acres in Canada and around 2 million acres in the U.S.
When Should You Sell Durum in 2018? And at What Price?
2018 durum markets are likely going to be categorized by one phrase: “What about the dryness?”
As we’ve discussed in detail, there are both bearish and bullish factors to contend with.
That being said, dry weather could easily trump everything, and we could see some pretty strong values.
Am I suggesting 2013/14 durum prices?
No, not necessarily. But I’ll never say never. For durum prices to get to those levels, we would need to see dry conditions in 2018 that mirror those of 2017, if not worse.
If we don’t see that, we’ll have to keep our price expectations in check.
We’ve heard from farmers in both the US and Canada that the rule of thumb they employ is to plant durum every year and then sell every second or third year.
Now, I’m not one to really like having birthdays on grain, but 2018 is potentially shaping up to be the year. The question intuitively becomes though, at what price?
Right now, we’re at 40% sold for old crop 2017/18 durum and 0% sold for new crop 2018/19 crop durum.
We sold this 40% of new crop back in July / August 2017 when we saw the market at the highs. Truthfully, I wish I might’ve done a little more but I’m content with where we’re at right now.
Add in that both domestic and international buyers are doing a more aggressive job of blending durum, we have to be realistic in our price goals.
I would argue if prices creep back closer to $8.00 – $8.25 CAD / bushel for #2 or better Canadian quality in most places, we’ll be looking to make our next sale. This would be a tick up of roughly 50 – 75 cents CAD / bushel in most places (thus, if your local price is around $8 today, just add the 50 -75 cents to it and that’s our target).
For our American durum producers, this would mean getting closer to $6.25 for #1 US durum.
If some soil moisture premium potentially creeps into the market in spring 2018, I wouldn’t be against booking up to 40% of new crop 2018/19 sales before the end of June.
Obviously though, we’ll be communicating all our durum prices expectations as we move along in the calendar.