December 15 – Protein Premiums Are Supposedly Soaring (But Where?)

I keep seeing headlines about wheat protein premiums increasing. How come I’m not seeing it around me? Where are they!?!

I keep seeing headlines about protein premiums increasing.

How come I’m not seeing it around me?

For one, the journalists are really only referring to the futures markets.

Second, you have to remember that the USDA recently upgraded the global wheat crop to the fifth consecutive record crop. That’s 5 straight years of new record wheat harvests!
Seems absurd but it has indeed happened.

But the majority of these back-to-back-to-back-to-back-to-back record wheat crops have been in soft wheat or winter wheat production. This translates to mostly lower protein product – AKA stuff that’s below 12% protein.

A lot of it has come from the Black Sea. For example, Russia harvested 83 million tonnes of wheat for the 2017/18 crop year.

Recent data suggests though that less than 1% graded #2, which is defined as 11.9% – 12.8% protein.

Further, 25% – or nearly 21 million tonnes – graded a #3, or 10.5% – 11.9% protein. 44% – or 36.5 million tonnes – identified #4 quality which means 8.8% – 10.5% protein. Another 31% – or nearly 26 million tonnes – graded feed quality.

Simply put, this is a lot of low quality wheat!  

Ultimately, this is why you’ve seen winter wheat prices on the Chicago Board of Trade and Kansas City Board of Trade drop to one-year lows recently.

Comparatively, Minneapolis hard red spring wheat prices are sitting at levels seen back in June before the market started adding dry weather premium.

As such, the spread between winter wheat prices (low protein) and spring wheat prices (higher protein) has reached levels not seen in a few years. More specifically, the spread is around $2 USD per bushel!

Already though, international buyers are buying up higher protein US winter wheat. Thus far in the 2017/18 marketing year, HRW wheat export that are 13% protein or higher is double the five-year average!

However, those with less than 13% protein aren’t likely to find any premiums at the farm-gate level. There’s just a lot of it available around you.

 

Wheat futures tumble; protein premiums soar

The U.S. Department of Agriculture’s latest “World Agricultural Supply & Demand Estimate” report confirmed that global wheat supplies are at a record high this year, according to Stephanie Bryant-Erdmann, U.S. Wheat Associates market analyst.

USDA increased its estimate for 2017-18 global wheat production to 755 million metric tons (mmt), up slightly from 2016-17 and a new record high. If realized, Bryant-Erdmann said it would be the fifth consecutive year of increased global wheat production.

This record-large global wheat production, she said, has pressured U.S. wheat futures to six and 12-month lows.

Since the beginning of the 2017-18 marketing year, the Chicago Board of Trade soft red winter (SRW) wheat futures and the Kansas City Board of Trade (KCBT) hard red winter (HRW) wheat futures have fallen 37 cents and 32 cents, respectively, to levels not seen since last December. The Minneapolis Grain Exchange (MGEX) hard red spring (HRS) wheat futures climbed in July, supported by concerns over severe drought in the U.S. northern Plains, but it has since fallen to within 14 cents of the June 2 price.

“This decline in wheat futures prices represents a significant opportunity for customers to lock in low futures values to hedge the risk of growing protein premiums due to the tight global supply of high protein wheat,” Bryant-Erdmann explained.

The USDA report also noted that lower year-over-year wheat production for 2017-18 was reported in Canada, Kazakhstan, Ukraine and the U.S. and is also expected in Australia. Bryan-Erdmann said this is important for customers that need high-protein wheat, because nearly all the world’s high-protein wheat exports (13% protein on a 12% moisture basis or higher) originate from those five countries plus Russia.

While Russia’s wheat yields exceeded expectations and boosted total production, high-protein wheat supplies are very limited, according to preliminary data for winter wheat from the Federal Centre of Grain Quality & Safety Assurance for Grain & Grain Products.

According to those data, 25% of samples graded as Russian third-class wheat (10.5-11.9% protein on a 12% moisture basis), 44% of the samples graded as Russian fourth-class wheat (8.8-10.5% protein) and 31% graded as fifth-class wheat (feed wheat). Less than 1% of samples graded as Russian second-class wheat (11.9-12.8% protein on a 12% moisture basis).

“With global high-protein wheat supplies shrinking for the second consecutive year and demand continuing to be strong, the premium between MGEX and KCBT wheat futures has continued to widen,” Bryan-Erdmann noted. In 2016-17, the inter-market spread between MGEX and KCBT averaged $1.05, compared to just 40 cents the prior marketing year. Year to date in 2017-18, the MGEX to KCBT spread averages $2.09.

Bryan-Erdmann noted that the demand for higher-protein wheat also supports HRW wheat protein export basis spreads, which have widened significantly this year at both Gulf of Mexico and Pacific Northwest ports.

She said the average premium over the past 15 years for 12% protein wheat (12% moisture basis) at the Gulf has been 14 cents/bu. This year, that premium is $1.96/bu. The 15-year average premium for 12% protein HRW wheat at the Pacific Northwest is $1.09/bu. Since the beginning of the 2016-17 marketing year on June 1, that average premium is $1.94/bu.

Despite the increased premiums for high-protein HRW and HRS wheat, Bryant-Erdmann said a review of USDA Federal Grain Inspection Service data reveals an increased percentage of high-protein wheat exports. For the 2017-18 marketing year, 77% of HRS exports have had at least 14% protein (12% moisture basis), compared to the five-year average of 70%. The percentage of HRW wheat exports at 13% protein and above is double the five-year average.

“With six months left in the marketing year, many customers are securing their high-protein wheat demands for the year,” she said. “While premiums for high protein continue to grow, U.S. wheat futures markets have fallen for four straight weeks, which offers a good opportunity for customers to lock in the lowest HRS futures prices seen since June and the lowest SRW and HRW futures prices since last December.”

H/T: Feedstuffs
About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.