Current Sales Position:
We are 80% sold on 2017/18 old crop winter wheat.
We are 30% sold on 2018/19 new crop winter wheat.
We have to apologize for the tardiness of this week’s Digest – we had to re-review some data points over the weekend and update some charts. With this transparency in mind, and the first half of 2018 on the books, this week we wanted to take the opportunity to provide you with an update on our views on every factor we track in the grain markets. The month of July gives us a chance to reassess events happening in the market and provide you with a framework of our expectations for winter wheat prices through the balance of 2018.
Today, we’ll be discussing important market factors such as:
– Russian Production and Exports
– Trump + Global Trade Negotiations
– European Wheat Prospects
Before we dive into each factor, let’s take a look at what happened to winter wheat prices in Chicago and Kansas City last week.
Chicago Soft Red Winter wheat prices:
- Sep ‘18: +2.8% or 14¢ to $5.152 USD / bushel
- Dec ‘18: +2.6% or 13.4¢ to $5.30 USD / bushel
- Mar ‘19: +2.1% or 11.4¢ to $5.436 USD / bushel
- May ‘19: +1.7% or 9.4¢ to $5.53 USD / bushel
Kansas City Hard Red Winter wheat prices:
- Sep ‘18: +5% or 24.6¢ to $5.13 USD / bushel
- Dec ‘18: +4.5% or 22.8¢ to $5.342 USD / bushel
- Mar ‘19: +3.7% or 19.4¢ to $5.496 USD / bushel
- May ‘19: +2.8% or 15.4¢ to $5.58 USD / bushel
We begin this week with a glimpse of prices during the last six months of the year dating back to 2013. The last two years has produced a string of prices under the $4.50 level.
Wheat prices in Kansas City and Chicago did find some gains this week. But prices remain lower than recent highs as traders continue to eye global trade uncertainty and weigh this factor against ongoing dryness in Europe and Russia.
Russian Production and Exports
As we’ve long argued, Russia’s wheat production and exports are driving global prices.
This week, the Russian agriculture ministry said that Russian exporters shipped 40.2 MMT of wheat overseas during the 2017/18 marketing year. That figure represented an almost 50% jump year-over-year in exports. This jump was achieved due to a massive harvest, combined with stronger logistics and a weaker ruble (the Russian currency). The nation was able to make a big splash in nations like Egypt and Indonesia and captured market share from countries like Australia that had relied on these markets in the past.
But export volumes for the new marketing year are expected to fall sharply. Hot, dry weather has extended across the Black Sea region and are driving down expectations for the crop size.
We’re looking at a pretty wide range of estimates for this year’s Russian harvest. Whether it’s 65 MMT or the larger 74 MMT estimates, the figure will still come in well below the record-breaking 85 MMT crop taken off last year.
Trump + Global Trade Negotiations
We had expected about a 10% chance of a trade war. However, this low-probability event did indeed occur.
While China has been the big focus on the soybean sector, the question for wheat producers is whether the U.S. will get back into the Trans-Pacific Partnership (TPP).
The United States remains out of the TPP, and other countries are moving full-steam ahead to closer economic ties. Japan ratified the deal on Friday, July 6th while Canada is in the process of ratification. Taiwan and Thailand are now talking about getting in on the deal. And Colombia is also considering a membership.
As we’ve noted in the past, the U.S. decision to leave the TPP will not help American farmers. Conversely, Australia and Canada will look to gain market share in Japan, which has been America’s top wheat market.
Trump has been pressed to get a “win” on trade. We don’t expect that re-entry into the TPP will be that win given the ongoing flip-flopping on this issue. However, with the recent GMO wheat find in a ditch in southern Alberta, it might be just the opening for the U.S. to get back to the TPP table. After all, on average over the past 5 years, Japan has imported about 6 MMT of wheat a year. Out of that, the U.S. has accounted for 49% of this, or, on average, 3 MMT.
However, under the TPP, Australia and Canada will now benefit from not having to pay a $65/MMT tariff on their wheat going to Japan.
2018/2019 European Wheat Crop Outlook
Across the ocean, wheat prices have been ticking higher in Europe. Wheat prices are sitting at one-month highs as dry weather continues to weigh on the size and the quality of the bloc’s wheat crop.
Expectations for the wheat harvest and exports have been declining. In Germany, DBV said that the country’s winter wheat harvest is expected to come in at 20.5 MMT. That would be a 15% drop from the previous year.
Meanwhile, weak harvest results in France continues to push wheat premiums higher. Strategie Grains said this week that French 2018/19 wheat production will come in at 33.2 MMT. That figure represents a 4.6 MMT decline from the previous year.
Across Europe, soft wheat output expectations continue to slide. Reuters said in a survey that the average analyst is projecting total soft wheat production to drop to 136 MMT, which would represent a 4% drop year-over-year.
On that note, wheat exports from Europe are sitting at a six-year low. This week, the EU said that exports fell by 16% in 2017/18 to 20.3 MMT. The EU could see soft wheat exports rise in 2018/19 to 23.3 MMT. However, there are several factors that could keep that figure in check.
The harvest is expected to come in smaller than initially thought. Russian wheat is more cost effective. Additional weather events are expected. And Spain – which had an ugly harvest in 2017/18 – might lead a boost in demand that cut into shipments.
U.S. Winter Wheat Plantings
This will likely be the second smallest winter wheat crop on record. The USDA projected total production of 1.83 billion bushels for 2018/19. This is just 86 million bushels higher than last year’s harvest. Despite low prices, the agency has suggested that American farmers had planted 47.3 million acres of winter wheat last fall, which was 1.3 million acres more than the fall of 2016..
This year, average yields are pegged at 46.9 bpa, another figure that tops the 2017/18 number (46.3 bpa). Despite the bigger crop, US total wheat ending stocks are expected to decline from 1.08 Billion bushels to 946 million bushels.
While the harvest is bigger than last year, the quality is still very much up in the air. An indication of this is that Kansas City contracts had traded at a large premium to Chicago wheat for weeks as traders sought high-protein wheat. That spread has narrowed in recent weeks due to ongoing dryness in the Russia and Europe, who produce the same soft red winter wheat that’s traded in Chicago..
North American Winter Wheat Exports
The USDA is projecting, as of their June WASDE report, that U.S. winter wheat exports will come in at 950 million bushels. That number was actually an increase of 25 million bushels from the May WASDE. The figure is also higher than the 900 million bushels from 2017/18.
It’s worth noting that ongoing dryness and the dip in Russian exports is providing some potential for the U.S. crop. But keep in mind that as the TPP begins to face implementation, nations like Australia and Canada will have a competitive advantage against the United States.
Wheat Buying Trends in the Middle East
The U.S. Wheat Commission abandoned Cairo, Egypt for a reason. The U.S. isn’t selling a lot of wheat to the Middle East. With Russia providing a steady stream of low-protein wheat to the region, the U.S. has been effectively priced out of the market. With that in mind, we expect that the U.S. export associations will shift their attention to South America and Asia.
Where do Winter Wheat Prices Go From Here?
The USDA projects that Russia’s production will slide by 19% from last year’s record of 85.0 MMT. The agency also projected a 1 MMT cut to EU output to 149.4 MMT. We’re also seeing the second-lowest amount of U.S. production. All of these factors should provide support to the global wheat market and to prices (particularly in Chicago).
But global stocks will remain high. Last year, global ending stocks came in at 272.37 MMT. This year, a big uptick in Chinese stocks will keep the world awash in wheat.
Based on the supply and demand factors, the markets appear to be trending toward prices we saw in 2015. For wheat prices to get back toward the upper bounds of 2014, deterioration of the crop in the U.S., Russia, and Europe would need to accelerate. There is a good reason to expect weather premiums to pick up in the weeks ahead. Speculators love dry forecasts, and it is shaping up for more of those on the other side of the Atlantic.
Over the next 6 months though, the above factors will be the main driving forces of winter wheat prices and we’ll continue to monitor them diligently. There is certainly more risk in the market today than there was 6 months ago, what with trade wars being all the rage. If cooler heads don’t prevail, then indeed, we might see some structural shifts in trade flows of major agricultural commodities that will influence low protein wheat prices.
As such, we continue to encourage you to be a risk manager: understand the factors, both to the upside and downside. If you have questions or don’t understand something, ask us! We want to make you a better manager of the assets that are your corn production and the best way of learning is by reading/listening and asking questions.
Have a great week!
– Brennan, Garrett, and Adrian
July 1 – Winter Wheat Weekly GrainCents Digest
June 29 – U.S. Total Wheat Acres Up 4%, Stocks Down 7% from 2017
June 29 – StatsCan Reports 24.7 Million Acres of Wheat in 2018/19
June 24 – Winter Wheat Weekly GrainCents Digest
June 20 – What to Make of the Canadian Wheat Woes?
June 17 – Winter Wheat Weekly GrainCents Digest
June 13 – Grow High Quality Wheat, and Ignore Trade War Talk
June 12 – June WASDE Shows Uptick in Global Wheat Stocks
June 10 – Winter Wheat Weekly GrainCents Digest