Wheat prices had been pulled lower along with bearish news for corn in recent weeks, but a change is in the works, creating price optimism and profitable marketing opportunities.
"Wheat will take on a life of its own," says Frayne Olson, ag economist at North Dakota State University. That means wheat becomes de-coupled from corn, which has been the price driver for the entire grain and oilseed complex in recent years. It might already be happening, with December Chicago Mercantile Exchange (CME) wheat contracts higher in seven of the past eight trading sessions through October 3, up a dime in mid-session trading on that date alone.
At the same time corn and soybean news in USDA’s September 30 Grain Stocks report was bearish, wheat surprised the trade with unexpected bullish news. Wheat stocks on September 1 were down 12% from year-ago levels to 1.854 billion bushels. "That’s the smallest amount of wheat on September 1 since 2008/09," notes Dan O’Brien, ag economist at Kansas State University. Two key reasons: stronger feed use this summer than the trade was expecting, but strong exports, too.
For wheat growers, this is a harbinger of improved pricing prospects. "U.S. wheat use is anticipated to increase for the 2013/14 marketing year, with projected prices increasing," O’Brien says. This is just the opposite picture for that of corn and soybeans, he adds.
Behind the newly found wheat optimism was a 10% jump in commercial disappearance June-August 2013 compared to last year at this time, USDA’s September 30 report shows. Feed and residual use was 414 million bushels this summer, up 38% from the 2007-11 average of 200 million, with strong exports of 338 million bushels, up 20% from the four-year average. Food use was up slightly to 238 million bushels. This bullish demand news is that it is occurring at the same time wheat production for 2013 is 2.128 billion bushels, down 6% from last year, USDA says in the September 30 Small Grains report.
Assuming likely yields for the 2013 wheat crop, O’Brien forecasts an average U.S. farm price of $7.45/bu., but as high as $8.50 under a high export scenario. USDA, in its September World Agricultural Supply Demand Estimates (WASDE) report, forecast an average new crop farm price of $7.85. The next report is scheduled for release October 11. On October 3, the December 2013 wheat contract was $6.96/bu. on the Chicago Board of Trade and $7.07 for May 2014.
It’s not just price levels that are improving. "Historically, we have seen a recovery in basis the first two weeks of October," predicts Olson. This year, basis recovery will occur October-November because of the change in the Canadian marketing system, he says. "That has fundamentally changed," he says. The driver was the elimination of the Canadian Wheat Board monopoly a year ago. Now, the Canadian system largely mirrors the U.S. one, with farmers making their own wheat marketing decisions.
Olson says that the wheat price outlook for 2013/14, even more than for corn and soybeans, will be determined by global macro supply-demand factors. "The wheat market is more liquid, fluid, and 40% to 50% of the U.S. crop is exported. That’s more than either corn or soybeans." Because of that, he advises producers to keep a close eye on production news this winter from the Southern Hemisphere that could have a major impact on prices, Australia and Argentina in particular. "Australia exports 70% to 75% of its production, much to the Pacific Rim, China," Olson says.
"If there is a production problem in Australia, it may pay to store," he says. "But without that, I’m not sure," Olson adds. Overall, he looks for a slow recovery in the market between now and the end of the year, but the potential for price stability after that. OIson leans towards a sales strategy that involves being sold between this fall and February. That said, global supplies are tightening, export sales have been good, and while global wheat supplies are adequate, there is a concern that high quality milling grade wheat could be in shorter supply, all creating the possibility for marketing opportunities. "There will be some unexpected event that creates marketing opportunities. There always is," he says.