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Wheat Outlook - Hard times for hard wheat

Large spreads in wheat could be ready to turn

USDA’s first ratings for winter wheat put out the fall before harvest are notoriously unreliable indicators of where final production will wind up many months later. A lot can happen to winter wheat over the winter, spring and summer, so what you see now is not necessarily what you’ll get come harvest.

That said, sometimes the ratings hold up – last year a good start held through during the growing season, with final yields nationwide setting a record.

So, while it’s early, USDA’s first ratings out Oct. 28 suggest potential for hard red winter wheat’s big discount to other classes may finally be ready to correct. While any adjustment will take time, the spread’s change could have a big impact on marketing both 2019 and 2020 wheat.

The ratings showed a stark contrast between east and west. Most of the soft red winter wheat states showed better yield potential than 2019, when lower acreage took production to an eight-year low, tightening stocks despite relatively tepid demand.

HRW results in 2019 were just the opposite. Yields reached the second highest level ever. As is usually the case, big yields meant lower protein, another knock that took HRW prices $1 or more a bushel less than SRW. HRW supplies amounted to 190 days of usage, 35% more than SRW.

Big carries in SRW thanks to the variable rate storage charges that figure into futures contracts got the crop locked up tight in the strong hands of commercial hedgers, forcing basis above the board in Toledo, the main delivery market. Cash is below option in Kansas but basis is much tighter than during the 2016 crop year that triggered reform in the storage charge system.

Spreads between July 2020 contracts still give SRW a premium of 77.5 cents, around 15 cents tighter than for December. So the market, at least, expects the disparity between the two classes to persist.

Whether it does will depend in part on acreage. Most states producing the two classes are ahead of normal according to Monday’s crop progress data. HRW states appear more likely to be able to finish because the eastern Midwest looks it like will remain wet into November. Whether farmers on the Plains will want to plant while cash wheat is $4 or less is another question. The market will have plenty of time to ponder these issues. USDA doesn’t put out its first survey of seedings until January, with key states reporting ratings monthly.

Cross-hedging wheat can be tricky as I’ve pointed out before. But it’s an alternative for HRW growers if they can trade futures, either with SRW hedges or by buying the inter-market spread outright. I haven’t recommended a lot of HRW sales because prices are so low; selling HRW cash and trading the spread might be one workaround.

Seasonally, it’s time to do something with old crop, anyway. The market tends to make up its mind in December, either making new lows or not. If you have significant amounts of old crop to price, or haven’t done anything on new crop, make sure you can stand a break to new lows if the market can’t find some good news.

Supplies out of the southern hemisphere look to be under pressure due to ongoing drought in Australia. Argentina is a question market depending on the policies of the new Peronist government. France has plenty of moisture but some questions are starting to emerge out of the Black Sea, where Russian wheat has been priced out of recent tenders. But the world still has too much wheat so end users aren’t getting excited yet.

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A return to more normal yields could lower production in 2020 and tighten supplies modestly.

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Initial yield projections from crop ratings for winter wheat showed gains over 2019 in most soft red winter wheat states while the Plains appears off to a slower start.

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December can mark a turning point for new crop futures, so what out if the market makes new lows.

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The spread between SRW and HRW traded out to historic proportions this year, but could finally begin to tighten in 2020.

Download a complete version of the outlook with extensive charts and analysis using the Download button at the end of this report.

More from Farm Futures:

Corn Outlook

Soybean Outlook

Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Market Review on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat futures that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

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