With 2017 now in the books, it’s time to look back at the major factors impacting prices in the winter wheat market. By knowing where we were, we will have a better sense of where we’re heading in 2018 and beyond.
Major trends in the space will not only affect prices in the U.S., but also decisions by farmers on what to grow and sell in the year ahead. Let’s take a look at the major events and price movements that defined 2017 winter wheat prices.
Winter Wheat Cash Price Review
While soft red winter wheat prices on the Chicago Board of Trade are the most heavily watched by the paper trade community, in the cash grain markets, Kansas City hard red winter wheat prices matter more to most farmers.
The Kansas City HRW spot price tells an interesting story about wheat’s wild 2017. The cash spot price of Hard Red Winter wheat actually finished the year up 17.4%, even though it certainly didn’t feel like it.
In early February, when the price pushed above $4.00 per bushel, we were looking at headlines about the massive downturn in acreage and reduced expectations for production.
As the summer months produced drought and extensive heat across the country, the cash price in KC above $5.31 on July 5. But the optimism would be short lived. From July 6 to August 29, the spot price plunged from $5.08 per bushel all the way down to a tick below $3.47.
Since October 31, when prices hovered at around $3.48 per bushel, we’ve seen some stronger appreciation.
The concerns about quality and limited supply in July have abated though. Now the worry, as evidenced by global production expectations, is that we have too much supply – even with U.S. and Australian production falling.
Even with newer concerns about winter kill hitting wheat-producing states during a blistering, late-year freeze, the prospect of seeing wheat prices pop back to levels seen in August appear slim.
How can this be?
From Russia With Wheat
When we look back on 2017, only one word is needed to sum up prices and trends in the wheat complex: Russia.
The country absolutely dominated headlines and caused headaches for wheat farmers around the globe. Since the Russian Federation began ramping up its grain production at the onset of the 21st century, it had taken time for the country to emerge as a dominant force in the agricultural space.
But 2017 will be marked as the year that casual observers had to finally pay attention.
When it comes to Russia’s 2017 wheat output, Alexander Tkachev, the head of the Ministry of Agriculture for the Russian Federation, is like a guy working the gas station price sign during a hurricane.
He’s just up on the ladder adding numbers…
The latest report this week 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.
It’s poised to hit another record high for exports.
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.
U.S. Winter Wheat Is in Retreat
In fact, U.S. producers’ own trade organization abandoned its Cairo office. U.S. Wheat Associates shuttered its Egypt office and has shifted its attention to Morocco.
While the group says that it will still aim to sell high-quality protein to millers in Egypt and the rest of the Middle East, the line has been drawn. Russia, Romania, and Kazakhstan are the preferred sources of wheat moving forward.
Of course, the trends for American farmers were noticeable at the onset of the year. Wheat acres hit their lowest levels in more than 100 years as farmers turned to other cash crops, particularly cotton. (This trend isn’t slowing down, and 2018/19 may see another big drop.)
The largest decline in acres came in the winter wheat space, particularly hard red winter wheat, according to RaboResearch. Wheat has simply become unprofitable across vast stretches of the United States.
State-By-State Output Slumps
The USDA said that 2017 wheat production declined by 25% year-over-year. Yields came in at an average of 46.3 bushels per acre, a sharp drop from the 52.7 bushels reported in 2016. And acreage was down across the board, a total of 14% for all types on a year-over-year basis.
Digging into the USDA’s Small Grains report, we find that winter wheat production slumped by 24% compared to 2016. Average yields fell from 55.3 bpa to 50.2 bpa in the span of a year.
Hard red winter wheat production totaled 750.332 million bushels. Digging into Brownfield states, production in 2017 was down everywhere except for Illinois.
Winter Wheat Production by State
• Illinois: 35.72 million bushels, up from 34.78 million in 2016
• Indiana: 17.76 million bushels, down from 22.68 million in 2016
• Iowa: 544,000 bushels, down from 1.071 million in 2016
• Michigan: 33.575 million bushels, down from 50.73 million in 2016
• Minnesota: 225,000 bushels, down from 488,000 in 2016
• Missouri: 36.72 million bushels, down from 39.9 million in 2016
• Nebraska: 46.92 million bushels, down from 70.74 million in 2016
• Ohio: 32.19 million bushels, down from 44.8 million in 2016
• South Dakota: 20.8 million bushels, down from 63.8 million in 2016
• Wisconsin: 11.56 million bushels, up from 19.75 million in 2016.
Aussie Wheat Troubles Continue
In Australia, the production numbers are even bleaker for winter crop. ABARES, the nation’s commodity forecaster, projects that winter crop production was off 41% from last year’s record of 35.1 million tonnes Analysts are blaming drier conditions that are damaging the crop in Queensland and New South Wales.
At a time that Aussie production is falling, Russia is moving into their export markets with brute force. This is especially evident in Indonesia, where Aussie wheat farms have maintained strong relationships with millers for years.
Black Sea exports are able to undercut Australia wheat exportsby a whopping $100 per tonne – Australian wheat options are now priced at about $290 USD per metric tonne (or $7.90 USD and $10.10 CAD per bushel using GrainUnitConverter.com) Price is a key reason why in less than two decades Black Sea wheat exports are poised to surge from 15 million tonnes just a few years ago to 55 million tonnes this year
The good news is that low American wheat prices have created some business opportunities. More specifically, US winter wheat has recently won a few Middle Eastern tenders, but exports are still tracking below last year’s pace, as discussed in detail on GrainCents.
Of course, every challenge in production creates opportunity.
Our FarmLead Marketplace expanded our existing coverage across the United States, and we quickly recognized a major trend tied to the massive slump in winter wheat output across the country.
Buyers not only need to source wheat for their quotas, but they also have distinct specifications for the wheat-based products they aim to source. Given the tight supply of high-protein wheat during the summer’s sweltering months (particularly in the Northern Plains), we saw quality premiums rise.
Farmers who could market to buyers and meet their distinct specifications were rewarded with prices that topped local elevators.
Get Better Wheat Prices in 2018
Next week, we’ll be releasing our 2018 winter wheat forecast to subscribers of GrainCents.
We’ll be diving deep into the bullish and bearish demand factors affecting 12 crop categories, and setting our initial plans for when we foresee selling opportunities on the horizon for our readers.
In GrainCents right now, there are 10 different factors that we have identified as either bullish, bearish, or noise for winter wheat prices.
With this insight, we help you identify windows to get the best price possible for your crop. We also identify in GrainCents what percentage you should be sold on your 2017/18 old crop winter wheat, as well as where your sales should be on your 2018/19 winter wheat crop.
And next week, we’re giving our GrainCents winter wheat subscribers a special report that is worth more than an annual subscription to the service on its own.
We’re unveiling our 2018 winter wheat forecast exclusively to our GrainCents readers.
Inside this report, we’re going to discuss the critical factors that will affect your winter wheat crop in 2018. More importantly, we’re going to begin to set our schedule for potential selling opportunities so that we can capture the best price possible in the year ahead.