It is just possible that the wheat market is “locked and loaded” — that is, positioned for significantly higher prices. What is needed is a target and someone to pull the trigger.

The U.S. wheat marketing year (June 1 through May 31) began with an extreme shortage of milling quality wheat (protein and test weight). The result was a 75-cent premium (July 2018 basis versus July 2017 basis). The USDA’s WASDE (World Agricultural Supply and Demand Estimates) report indicates that more wheat will be used during the 2018/19 marketing year than will be harvested.

Using more wheat than is harvested implies that, in July 2019, there will be an extreme shortage of milling quality wheat. More importantly, the WASDE implies that the market may run out of milling quality wheat available from foreign exporters, and importers may be forced to buy U.S. hard red winter (HRW) and hard red spring (HRS) wheat.

World wheat production, for the 2018/19 wheat market year, is projected to be 27 billion bushels, and use is projected to be 27.3 billion bushels. More use than production implies that nearly all of the 2018/19 marketing year’s quality milling wheat will be used.

QUALITY WHEAT TIGHT

The major hard wheat exporters (Argentina, Australia, Canada, Kazakhstan, Russia, Ukraine, and the U.S. [HRW and HRS only]) are projected to produce 7.808 billion bushels, compared to 8.362 billion bushels projected to be used (domestic and export).  

Using 554 million bushels more than is produced will be accomplished by blending relatively high quality 2018/19 wheat with 2017/18, or earlier, harvested wheat. Using 2017/18 wheat is also a signal that July 2019 quality wheat may be in tighter supply than in July 2018.

The 2018/19 marketing year U.S. hard wheat (HRW plus HRS) production was 1.249 billion bushels (662 million bushels HRW and 587 million bushels HRS), compared to total use of 1.41 billion bushels

If Oklahoma and Texas prices follow the same pattern as during the 2017/18 wheat marketing year, prices should start an upward trend during the late January time period. On January 15, 2018, prices were in the $3.50 range. By May 1, they had reached $5.00 in many Oklahoma and Texas markets.

Factors restricting wheat price increases include the increasing value of the dollar, the relatively high cost of ocean freight from U.S. ports, and the availability of Russian and Ukrainian wheat.

INCREASING DOLLAR VALUE

Since January 1, the value of the U.S. dollar compared to the Russian Ruble has increased 17 percent. Russia offered 12.5 percent protein FOB (free on board vessel) for $6.15. Since January 1, U.S. wheat prices have effectively increased $1.20 compared to Russian prices.

The 2018/19 wheat marketing year HRW exports are 36 percent below 2017/18 exports at the same time last year. By contrast, the USDA projects 2018/19 U.S. HRW wheat exports to be three percent less than during 2017/18.

The 2018/19 marketing year Russian wheat exports are projected to be 236 million bushels (16 percent) less than during the 2017/18 marketing year. As of Nov. 29, 2018/19, Russian wheat exports were 20 percent ahead of their 2017/18 exports.

Something has got to give!

Maybe the USDA expects Russia to run out of exportable wheat and for U.S HRW export demand to dramatically increase after Jan. 1. If the USDA is correct, wheat prices would be expected to dramatically increase.

We will have to wait and see what is going to happen. But right now, U.S. wheat prices are “locked and loaded.” Wheat importers will provide the target and U.S. producers will pull the trigger.