What Will Help Spring Wheat Prices Recover in 2020?
Hard red spring wheat prices are sitting marginally lower than this time a year ago, for both new and old crop, and bullish factors appear limited. With soft red winter wheat prices in Chicago currently worth more than hard red spring wheat prices in Minneapolis, it’s hard not be frustrated with conditions in the current market! Accordingly, I’d like to walk you through a few of the different variables I’m thinking about that will influence spring wheat prices in 2020.
Spring Wheat Prices Return to Harvest Highs
Back at the end of September, challenging harvest conditions in the U.S. Northern Plains and Western Canada helped spring wheat prices on the futures board rally. However, as farmers in these regions showed their resiliency and ability to get a crop off, dry it down, and bring it to market, the rally in spring wheat prices faded.
Thanks to grain prices across the complex finding positive gains in December, spring wheat prices also rallied again, gaining 8-9% on old crop contracts and slightly less for 2020 new crop values. Accordingly, spring wheat prices in Minneapolis basically ended 4Q2019 the same way they started the calendar quarter.
That said, in the cash market in Western Canada, you can tell in the chart below that HRS wheat prices was lockstep with the futures market rally. While average HRS wheat prices in the Canadian Prairies are still about 50₵ CAD/bushel below where we were a year ago, these levels may be near the top of the market for the next few months.
Conversely, lower protein spring wheat prices – i.e. CPS wheat – continues to perform very well, albeit, like hard red spring wheat prices, still a bit behind last year’s levels. I’ll talk about the implications of today’s spot spring wheat prices on 2020 new crop values in a bit, but in the meantime, consider where spring wheat prices – be it CPS or HRS – have trended between now and June last year. More explicitly, look at how spring wheat prices trend lower from February to May, and then the sideways-to-lower activity from June/July through September.
2019/20 Spring Wheat Exports Matching Last Year
Well, sort of. In recent weeks, export data from the Canadian Grain Commission shows that Canadian non-durum wheat exports are starting to improve a bit but are still tracking behind last year by 12%. Digging deeper, 6 MMT of Canadian non-durum wheat has sailed through Week 19 of the 2019/20 crop year.
Comparably, U.S. hard red spring wheat exports are looking slightly better than a year ago with 3.82 MMT sailed through Week 29 of the 2019/20 crop year. Total U.S. wheat exports are tracking 18% above last year through Week 29: 13.81 MMT have been shipped out of American ports.
Complicating U.S. wheat export activity of late is the rise in geopolitical risk out of the Middle East.  There’s been a healthy amount of U.S. wheat exports heading to the Middle East, but with military tensions elevated, the transport cost of getting commodities into the region has intuitively increased. Notably, Iraq is the one of the largest importers of wheat in the Middle East and has been buying U.S. wheat but the country just voted to expel U.S. troops, somewhat complicating other business happenings between the two countries. (Note: I’m not counting Egypt, which is one of the largest wheat importers in the world and is technically considered a part of both the Middle East and North Africa).
Spring Wheat Prices Helped by Southern Hemisphere?
One of the biggest factors that could help push spring wheat exports higher is smaller production from the Southern Hemisphere. In early December, ABARES, the Aussie version of the USDA, came out with some significantly lower forecasts for Harvest 2019. Notably, the 2019 Aussie wheat harvest is expected to fall by 8% year-over-year to 15.85 MMT. We know that some Canadian wheat headed to Australia last year to help fill their domestic needs and it’s more than likely this could happen again in 2019/20.
As I mentioned in my FarmLead Breakfast Brief commentary after the release from ABARES,
“Very simply, the effects of three years of drought on the east coast and the past year of dry conditions in Western Australia are rearing its ugly head in terms of what Harvest 2019 is able to produce. That said, in the globalized trade game, one country’s production issues from Harvest 2019 is another’s gain. Case in point, while there is likely some higher protein available in Australia (due to drought conditions), they certainly won’t have the quantity to export a lot of it. This means that more of it will be used within domestic milling needs, leaving the door open for Canadian or American wheat exports to take advantage.”
With at least 9 MMT in domestic demand needs from Australia, I’m doubtful that wheat exporters in the Land Down Undaa will be able to hit the USDA’s target of 8.4 MMT (which was, by the way, downgraded by 600,000 MT from 9 MMT in the December WASDE report). Complicating things is the recent spread of fires in Australia, albeit the impact is being more heavily felt by the livestock sector than grains.  That said, infrastructure and logistics are not running at 100%, which could continue to weigh on Australia’s exportability to its usual markets in Asia.
On the other side of the world, Argentina’s wheat harvest came in slightly below initial expectations but it was still a solid harvest. However, a freshly-elected federal government just raised export taxes on corn, soybean, and – you guessed it – wheat.  This is notable as the export tax being increased to 12% might be enough to sway international buyers to Canadian or American wheat instead, be it winter or spring varieties. As Platts points out, the main market we’ll have to watch is Asia as, although the needs of wheat millers there are generally covered through 1Q2020, thereafter it’s a bit of question mark. 
Spring Wheat Prices in 2020
If American and/or Canadian spring wheat exports can find a little more business in Asia, then 2019/20 ending stocks might be a bit less than the current forecast. Despite the Harvest 2019 challenges, the USDA said in the December WASDE that HRS spring wheat stocks at the end of the 2019/20 crop year will total a little under 7.16 MMT, or down 3% from 2018/19. Comparably, combined with a little bit of winter wheat stocks, Canadian non-durum wheat stocks should total 5 MMT. That’s up nearly 20% from the 4.24 MMT that Agriculture Canada says the 2018/19 crop year ended with.
Put simply, with 2019/20 spring wheat ending stocks between the U.S. and Canada topping 11 MMT, there’s quite a bit in the market. Accordingly, with new crop hard red spring wheat prices notably lower than a year ago, the market is telling us that less acres will need to be planted. More specifically, I looked at October 2019 new crop prices on January 4th, 2019 and compared them to October 2020 new crop prices as of January 3rd, 2020, and the difference is prominent.
I’m expecting more hard red spring wheat acres to be switched over into either CPS wheat or durum, the latter of which I mentioned in my 2020 outlook for durum prices. Ultimately, I’m expecting hard red spring wheat prices to start to trend sideways-to-lower before stabilizing at a new price equilibrium that reflects lower hard red spring wheat acres in both Canada and the United States. Of course, my theory can easily be thrown out the window if we have a weather event or spring wheat exports pick up from their current pace, especially from Canadian ports.
Conversely, with higher expectations for CPS wheat acres in Plant 2020, any decline over the next few months is likely to be more pronounced than HRS wheat prices. That said, we’re going to have to watch U.S. winter wheat markets as this is what CPS wheat prices tend to be benchmarked off off (Read the 2020 outlook for winter wheat prices here!). Regardless, CPS wheat prices continue to be a profitable option compared to traditional HRS wheat prices and this is likely to push more Canadian farmers to this alternative in 2020.
Manage risk accordingly this year!
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