In our 2017 review of winter wheat markets, we noted that global wheat markets are facing increasing pressure from the growth of the Black Sea, namely Russian production.
The 2018 winter wheat outlook includes more concerns about the ever-rising increase of Russian influence on the global wheat sector.
In this in-depth assessment of the 2018 winter wheat market, we explore the bullish and bearish factors impacting domestic prices. This list includes:
• Global macroeconomic conditions and the Federal Reserve’s influence on the U.S. dollar
• US. wheat export expectations in the wake of rising protectionism from the Trump administration.
• Egyptian wheat imports and the shift of Middle Eastern – Asian market demand
• Weather volatility, La Nina, and the recent Polar Vortex; and,
• When you should be selling winter wheat in 2018 (and why!).
Our current winter wheat factors page on GrainCents features a multitude of variables that categorize as either bearish, bullish, or just noise for the complex. We’ve streamlined these factors to produce an outlook that will provide readers with a more complete picture of where prices are heading and when to sell their grain.
You can easily read how we view and make sense of the grain markets here.
GrainCents winter wheat readers also see our sales position for 2017/18 old crop and 2018/19 new crop.
It’s 2018 though so let’s dig into what FarmLead is expecting this year for winter wheat prices.
Heading into 2018, the world wheat complex is looking at Russia as the largest obstacle to higher prices and profitability.
The nation’s surge of production and exports has flooded markets once common destinations for Western exports.
The glut in global wheat supply has put downward pressure on prices. Due to the plunging profitability of growing the cereal, U.S. winter wheat acreage has fallen to the lowest level in more than 100 years.
Growing competition from Russia and other Black Sea exporters comes at a time that the global economy has stabilized. Heading into the new year, the largest potential shocks to prices are international in nature.
This year, global economic growth will likely hit levels not seen in more than a decade.
In the United States, GDP growth could reach 3%, but such growth likely would not be sustainable beyond this calendar year. A conservative estimate for economic growth falls between 2% and 3%, with low unemployment and a slight increase in wages.
Fresh off its December 2017 interest rate hike, the Federal Reserve will continue to wade into uncharted waters as it begins the tapering of its $4.5 trillion balance sheet.
Under the new leadership of Jerome Powell, the central bank is expected to raise interest rates several times again this year. However, the Fed won’t make too many moves if concerns about weak inflation sustain well into the year.
Rate hikes would have a strengthening effect on the U.S. dollar and would make American commodity exports less competitive against other international suppliers.
As we kick off the new year, this in-depth assessment of the 2018 winter wheat market offers our proprietary views on critical factors.
U.S. Acreage and Production Declines
Given the state of the U.S. wheat market, it might make more sense to begin with bearish factors
However, the silver lining in this story is that falling acreage and concerns about crop quality will create distinct opportunities for farmers with high-quality protein.
The USDA said that 2017 winter wheat production declined by 24% year-over-year. This included a 30% drop in hard red winter wheat (like that traded on Kansas City’s exchange) to 20.4 million tonnes
Chicago-traded soft red winter wheat production also dropped 15% to 7.95 million tonnes.
American winter wheat yields came in at an average of 46.3 bushels per acre, a sharp drop from the 52.7 bushels reported in 2016. And harvested acreage was down across the board, a total of 16% for all winter wheat types on a year-over-year basis.
Moving into 2018, U.S. winter wheat acreage is expected to slide anywhere from 4% to 6% from last year’s already low numbers! This because farmers are struggling to make a profit and have turned to other crops like cotton to pay the bills.
At around 31 million acres of winter wheat seeded this fall across America, this would be lowest in over 100 years.
A Polar Vortex and 2018’s Winter Wheat
A rally kicked off 2018’s winter wheat markets thanks to a wall of cold weather that turned parts of the Midwest into what resembled a set from the television show Game of Thrones.
Frigid temperatures battered wheat-growing states at a time that farmers were already facing significant drought conditions.
From November through December of 2017, it was hard to find a field between Colorado and Indiana that had more than 50% of normal rainfall for the period. Further, with very little snow cover offering protection to the winter wheat crop, concerns about winter kill spilled into numerous reports from USDA scouts.
At a time that acreage is at lows not seen in a century, crop quality metrics suggest that higher-protein quality could be scarce in the months ahead, and that yields could suffer.
Overall, given the drier conditions, we’ve noted that we’re watching the September and December 2018 winter wheat prices on the futures board. We’ve already captured some of the carry in the market that was available earlier this year and we won’t be afraid to do it again soon.
We’ll be looking for more clues in the January WASDE report for possible bullish news.
However, it’s more likely that February and March reports will have a more pronounced impact on price and sentiment.
La Nina Pressures in South American Wheat
Dryness has spread across Kansas and the western Great Plains, but don’t ignore the ongoing La Nina conditions battering wheat producing regions in Argentina. Farmers have been forced to delay planting in regions around the country. Rain is critical to bring the seed to germination.
Total Argentine wheat production is slated to decline from 18.4 MMT to 17.5 MMT. Argentine exports are expected to decline from 13.60MMT to 11.5 MMT.
These numbers come despite a slight uptick in acreage from 13.74 million acres to 13.84 million. Yield conditions are expected to deteriorate from 49.22 bushels per acre in 2016/17 to 46.54 bushels per acre.
In Brazil, the USDA projects that wheat production will fall to 4.25 MMT from 6.73 million last year. That figure, if realized, would represent a 37% drop year-over-year and 24% below the five-year average.
The decline is mainly attributed to lower harvested acres (down about 10% from 2016) and much lower yields. Technically, Brazil saw record average wheat yields of 47.3 bushels per acre for their 2016/17 crop. This year though, in 2017/18, yields will fall 9% below the five-year average (and 30% year-over-year) to 33.3. bushels per acre.
Despite the smaller Brazilian crop, it’s estimated that their imports will be very similar to last year at 7.3 million tonnes but exports are expected to climb to 1.1 million tonnes, versus 700,000 tonnes.
There’s a lot of wheat left over in Brazil after last year’s huge crop! Coming into the 2017/18 crop year, beginning stocks were pegged at ending stocks for 2017/18 was estimated at nearly 2.4 million tonnes.
By the end of 2017/18, Brazilian wheat inventories will should be closer to 2.08 million tonnes, and that’s still 27% more than the five-year average.
Ultimately, it’ll come down to quality though as the market will want the product that can satisfy its needs. With the likelihood that this has been worked through from the 2016/17 crop, and a smaller 2017/18 crop on the way, Brazil will be looking more good quality in the back half of 2018.
Quality and Size of the Australian Crop
After a record crop in 2016/17, in Australia, the production numbers remain bleak for the wheat crop.
ABARES, the nation’s commodity forecaster, projects that winter crop production was off 41% from last year’s record of 35.1 million metric tonnes. Analysts are blaming drier conditions that are damaging the crop in Queensland and New South Wales.
That will bring Australian wheat production down to 21.5 MMT. That figure comes despite a slight uptick in acreage from 30.6 million to 30.88 million acres.
Australian wheat yields will decline, according to the USDA, from 49.21 bpa to 46.54 bpa. Australian exports are pegged to fall from 23.0 MMT to 18.0 MMT.
As we’ve noted in GrainCents and FarmLead Insights, Black Sea exports have captured Australian market share in critical export markets like Indonesia. The smaller crop has opened the door for more North American exports to make its way in there though.
European Union Wheat Prospects
Markets also anticipate that European Union wheat production will decline in the year ahead. We watched Strategie Grains lower their expected EU acreage numbers just before the start of the year.
Overall, they said that total soft wheat acreage would decline to roughly 58 million acres. That was about an 850,000-acre cut from the previous year. The company went on to slash forecasts for the following year as well due to poor growing conditions in Northern Europe.
This downward trend in expected acreage has accelerated since 2014.
Thanks to low prices and tougher conditions, it’s been estimated that European soft wheat farmers only planted about 57.5 million acres in the fall of 2017.
While crop conditions are relatively benign today, it’s clear that a smaller European soft wheat crop is expected in 2018.
BEARISH WINTER WHEAT FACTORS
Global Production and Wheat Stocks
The world is awash in wheat, regardless of whether U.S. producers slash acreage in the new year.
The USDA notes that global production will hit 755.2 million metric tonnes, a 1.6-million tonne jump from last year’s record crop.
In fact, it’s the fifth straight year of record wheat production in the world.
As such, we expect to see the 4th straight year of record wheat ending stocks.
By the end of 2017/18, total available wheat supplies around the world will sit at more than 268 million tonnes. This is a 4.5% jump from last year and nearly 14% more than the five-year average.
The most noticeable increase is in Russia. The USDA expects that Russia will still have more than 17 million tonnes of wheat going into the 2018/19 crop year.
This is a 60% jump from 2016/17’s carryover and a staggering 92% increase over the five-year average of 9.05 million tonnes. (read below for more on the bearishness that is Russia, the new Wheat King).
Ending stocks are expected to rise significantly in China as well (albeit this is more of a data point as they only import about 3-4 million tonnes of wheat per year. At 127.5 million tonnes of wheat left over by the end of 2017/18, the People’s Republic will see a 15% jump from last year and a 36% jump from the five-year average.
Rounding out the major players, the European Union will still have 11.3 million tonnes of wheat available in the bloc at the end of the 2017/18 crop year. This is up 6%
Russian Production and Export Totals
Russia’s production figures continue to rise.
The latest from TASS, the Ministry’s press service, says that total harvest net weight came in at 85.8 million tonnes. That number is higher than the 83 million tonnes forecasted earlier this month by the USDA.
An 85.8 million-tonne wheat crop would be 18% bigger than the 2016/17 wheat crop of 72.5 million tonnes (also the previous record).
Using the USDA’s number, the crop would be 14% over 2016/17 and 27% from the five-year average. For further perspective, Russian wheat production has climbed nearly 170% in the past two decades.
They’re also poised to hit another record high for exports. The USDA projects that exports will jump from 27.809 MMT to 32.5 MMT. That latter figure represents a 16.8% jump year-over-year.
The country’s price and proximity advantages in the Black Sea has made its production an attractive source for Middle Eastern countries. It’s also made countries like the United States, Canada, and Australia far less competitive in the region. We rarely even hear any of their names considered when Egypt’s buying agency GASC issues a tender.
Total Black Sea exports are slated to increase from 54.4 million metric tonnes in 2016/17 to 59 million metric tonnes this crop year. In addition, production is slated to increase from 130 to 139.3 million tonnes.
The Impact of U.S. Protectionism on American Wheat Exports
U.S. wheat exports are slated to decline by 8% year-over-year to hit 26.5 million metric tonnes.
Part of that story is told through the decline in domestic acreage and production and the increase of competition abroad (i.e. Russia).
However, another key factor is shaping up to the detriment of wheat producers.
In the past five years, the U.S. has been responsible for about 45% of Japan’s wheat imports.
But the tide appears to be changing.
Japan will soon implement its own free-trade agreement with the European Union while it engages with additional partners in the Transpacific Partnership (TPP). Other wheat exporters are expected to capture U.S. market share even as Japanese demand increases over the next few years.
To give further perspective, nearly half of Japan’s imported wheat is hard wheat (US Dark Northern Spring or Canadian Hard Red Spring) and is used for making bread.
Last calendar year, Japan imported 2.5 million tonnes of food wheat from the US and 1.7 million tonnes of Canadian food wheat. This accounted for 49% and 34% of all food wheat imports by the country.
With the trade policy changes and a weaker Canadian Loonie, and Canada has been able to increase its ownership of Japanese wheat imports.
Meanwhile, the U.S. is stalled in renegotiations with Mexico and Canada over the North American Free Trade Agreement (NAFTA). Mexico was the largest consumer of U.S. wheat last year.
However, recent resentment toward President Trump’s administration has fueled speculation that Mexican wheat buyers will seek product from other alternative sources.
Potential markets include Canada, Argentina, and even Black Sea producers if the price is right. Even though that a significant change to NAFTA is highly unlikely given the negative economic impacts expected, the longer this stalemate extends, the more Mexican buyers may seek to bolster relations with new suppliers.
Coming back to the U.S., 2017/18 hard red winter wheat, exports are expected to decline from 12.4 MMT to 11.0 MMT. Soft red winter wheat exports are also expected to decline 8% year-over-year to 2.31 million tonnes.
In the American white wheat market (which is made up predominantly of hard and soft winter white wheat), US exports are expected to hit 5.72 million tonnes. That would be up 29% from last year’s 4.44 million tonnes
Thus far, US HRW wheat exports sailed are tracking 13% year-over-year to 5.6 million tonnes. SRW wheat exports are only 1% lower at 1.2 million tonnes. However, white wheat shipments are tracking 27% at 3.11 million tonnes through the end of December.
More specifically, white wheat is saving US winter wheat exports as total American winter wheat shipments are at 9.9 million tonnes, down just 2% from this time a year ago.
Middle Eastern Wheat-Buying Trends
Egypt continues to ramp up purchases from Russia and the Black Sea. All told, the country can secure supply about $15 to $20 per tonne less than U.S. and Canadian alternatives.
Egypt’s three largest suppliers are Russia, Romania, and Ukraine.
Meanwhile, the U.S. wheat industry is literally retreating from Egypt.
U.S. Wheat Associates (USWA) shuttered its office in Cairo, Egypt in December.
Egypt and Indonesia are the top two largest importers of wheat on the planet. Russia and Black Sea exporters continue have taken away business from the U.S. and Australian producers over the last decade.
2018/19 Wheat Crop Conditions
In the year ahead, we’ll regularly hear estimates and expectations from trade analysts, government officials, speculators and prognosticators on quality and production numbers for this year’s… and next year’s wheat crop.
We’ll even the occasional financial journalist who magically discovered agricultural commodities as a tradeable asset. Today’s media space is designed to make average people feel like they’re falling down a flight of stairs without a handrail to help them brace their fall.
There will be a lot of information coming at your fast in the next month alone over: Winterkill, the Polar Vortex, and the conditions of winter crop.
The reality is that we will simply not know the quality of this crop until it comes out of dormancy. Not this year’s crop… and not next year’s crop.
With that in mind, our goal is to have a specific grain marketing plan that fits any scenario and adapt as the market moves on.
In tight markets, we will focus ensure that we market our grain to as many potential buyers across the country who are looking to fill their quota.
In a market where wheat output surprises analysts, we’ll want to quickly learn our grain specifications and begin to market our product in a different way to make the crop stand out against other supply.
In the year ahead, it will benefit farmers to be more active managers of their crop rather than simply taking what the market gives them when it comes to price.
When Should You Sell Winter Wheat and At What Price?
2018 winter wheat markets is likely going to be categorized by one word: challenging.
But we have a plan.
Over the next 6 weeks, we’re expect to see more headlines that are enthralled with the damage that negative weather is doing to the American winter wheat crop.
Since soft red winter wheat prices on the Chicago Board of Trade tend to get the most amount of attention from hedge funds and other money managers, we’re starting our winter wheat prices watch there.
Today, we’re 70% sold on old crop 2017/18 winter wheat and 20% sold on 2018/19 new crop wheat.
With weather concerns about the winter wheat crop already in the field we’re expecting more price premium to be added to the September and December 2018 contracts. The reason behind this is that less acres means even more risk to production if there are weather issues.
Naturally though, these rallies will be reigned in by the fact there is a record amount of wheat that’s being carried over from the 2017/18 crop year into the 2018/19 crop year.
The other factor that could potentially give us some selling power is feed demand. As noted, wheat going into feed in 2017/18 is down 23% in the United States to 3.27 million tonnes. Conversely, in Canada, it’s up about 9% year-over-year to around 3.7 million tonnes.
If corn prices were able rally thanks to La Nina-induced production concerns out of South America, we might see some substitution effects for more feed wheat going into livestock rations.
Ultimately, we’re looking for weather premium to drive our next sales of BOTH old and new crop. Specifically, we’re looking for values to increase at least 20 – 30 cents on the winter wheat futures board before pulling the trigger. But we do expect to happen within the next 6 weeks as we try to “Sell on the Rumor, and Profit on the Fact”
Here our expectations for specific futures levels to get hit on the March 2018 front-month contract before the end of February 2018 (all prices listed in USD per bushel)
- $4.40 – 95% (you’ll never hear us “it’s a guarantee”. That’s just bad risk management)
- $4.50 – 80%
- $4.60 – 50%
- $4.70 – 35%
- $4.80 – 10%
- $4.90 – 5%
As we move past the March contract and into the spring seeding frenzy, we’ll look to update our price expectations.