2013 Outlook: Wheat Prices to Tag Along with Corn

November 4, 2012 11:00 PM
2013 Outlook: Wheat Prices to Tag Along with Corn

Editor's Note: For seven weeks, AgWeb.com is taking a look at experts’ projections for a variety of commodities in 2013.

Today, experts Ed Usset and Brian Williams reflect on this year’s wheat crop and share their expectations for the future.

Tell me a bit about yourself and your role at your university. Why is wheat a commodity that interests you?

Usset: I am a grain marketing specialist for the University of Minnesota. I spent the first dozen years of my career as a wheat buyer for several major flour mills–wheat is a much more interesting commodity than corn or soybeans.

Williams: I am an assistant extension professor at Mississippi State University. My primary specialty is commodity marketing, specifically for corn, soybeans, wheat, sorghum and cattle. In addition to commodity marketing, I also work on farm management, production economics and some policy.

One of the biggest reasons that I am interested in the commodities I cover, including wheat, is because I grew up around them. I was born and raised on a farm in Nebraska where my parents grew each of the commodities I cover. I think the best way to summarize why I cover wheat is that wheat played an important part of shaping me into who I am.

How would you characterize this year’s wheat crop and the market for the commodity, both in the U.S. and globally? What, if anything, surprised you?

Usset: I am not a traditional supply and demand analyst (other respondents will do a better job of an "inside baseball" look at the numbers worldwide). I know that wheat supplies worldwide are paring back and that in general, the balance of supply and demand is becoming much more interesting.

One note of interest: a high quality and high protein crop has cut protein premiums to almost nothing. There are days at the MGEX that 15% protein wheat trades at a discount to 13% protein. This is not unprecedented, but it is uncommon (it happens about one in 10 years). It stands out because over the past three years (particularly with the 2009 and 2010 HRS crops), it was not uncommon for there to be a $2/bu. premium from 13% to 15% protein.

Williams: Both total wheat production and consumption in the U.S. are lower this year. Wheat only saw a small hit in yields as a result of the drought when compared to other crops with average yields 2.6 bu/acre lower this year than last. A good portion of the wheat crop matured before the drought took hold in the Midwest, minimizing the drought’s impact on yield.

While wheat disappearance for food and seed are slightly higher than last year’s totals, exports saw a sharp decline. Feed and residual use is seeing significant growth going into next year. Much of the increase can be attributed to higher corn prices due to this summer’s drought causing wheat to become a feasible alternative to corn.

Globally, wheat production did not fare as well. Wheat production is projected to be lower in Russia, Australia and the European Union as drought persists in each of these regions. Global wheat use is also projected to be lower.

Walk me through your wheat forecast for 2013. What should producers, sellers and buyers know now about the market? What can they do to be better prepared for the year ahead?

Usset: While the old crop supply/demand balance is more interesting (read "bullish"), wheat direction will be heavily influenced by trends in the corn market. If corn prices decide to take a major step back over the next six months, wheat prices will have a difficult time rising. By the way, I am more bullish than bearish on old crop corn prices over the next six months. Basis in corn (and, I suspect, wheat) will be high and swing wildly until the start of summer.

While I sound bullish, wheat prices for 2013 are appealing. I hope wheat producers have wrapped their mind around early pricing opportunities for 2013 delivery.

Williams: There are several factors to watch for in 2013. The biggest factor in terms of wheat supply is to watch the drought situation on a global basis. Australia has seen some relief lately, but it looks like it is too late to have much of an impact on the current crop.

In terms of the U.S., much of South Dakota, Nebraska, Oklahoma and Kansas are still in an extreme drought. Rain and snow over the winter and into the spring will play a vital role in determining wheat production in 2013. Well over 80% of the winter wheat crop has been planted already, so upcoming USDA reports on planted acres should provide a good estimate of how much wheat has been planted.

In terms of prices, the USDA’s most recent estimate is $7.65 to $8.55/bushel, but as of October 31 the Kansas City July 2013 futures price for wheat was $9.12/bu.

My understanding is that there are several key types of wheat, some of which are in greater supply than others this year. Break down the major wheat types grown in the U.S. and talk about the market year ahead. Will there be any significant changes over this year?

Usset: There are six major classes: hard red winter, hard red spring, soft red winter, soft white wheat, durum and hard white wheat. Substitution of classes and blending is the norm in the wheat milling industry. This is what makes trading wheat so much more interesting than corn or soybeans.

Williams: There are five main types of wheat grown in the U.S.: hard red winter, hard red spring, soft red winter, soft white, and durum.

Hard red winter wheat is the most common type with a USDA estimate of 1,004 million bushels produced in the 2012-13 crop year, which is up from 780 in 2011-12. Hard red winter wheat is grown mostly in the plains states from Texas to Montana. This year’s crop saw an increase in supply as a result of improvements in the 2011 drought in Texas and Oklahoma.

Soft red winter wheat production is estimated by the USDA to be 420 million bushels and is grown mostly in the Corn Belt and the Mississippi River Delta. This estimate is down from 457 million bushels in 2011-12.

Hard red spring wheat is grown in South Dakota, North Dakota, Minnesota, and Montana and accounts for an estimated 505 million bushels in 2012-13, up from 398 million bushels in 2011-12.

Soft white wheat is grown in Oregon, Washington, and Idaho with a USDA estimate of 237 million bushels, which is down from last year.

Durum wheat production is estimated to be at 82 million bushels and is grown mostly in North Dakota. The 2012-13 production is estimated to be significantly higher than the 50 million bushels produced in 2011-12.

One presentation I heard recently suggested that if wheat production doesn’t increase substantially, supplies of certain kinds of wheat could drop below the 90-day supply threshold. Is this a serious risk? If so, what would that mean for commodity prices?

Usset: Wheat is a food grain, and no other grains are a serious substitute for wheat in the world market. Corn is a feed grain with many substitutes (including wheat–wheat, I believe, is the second most commonly fed grain in the world) in the world market. As such, wheat prices tend to be more sensitive to tight stocks situations.

Examples: In the last two years (and this year), the carryout situation in corn was tight–about 1 month of usage remaining at year-end. Corn prices have roughly doubled. In 2007-08, the carryout in wheat fell to less than 2 months, but wheat prices surged to $20/bu. or more in HRS–prices tripled or quadrupled. Wheat is more sensitive to a tricky supply-and-demand balance.

Williams: While it is possible for stocks to drop below the 90-day supply threshold, I do not foresee any serious shortages. Before we see a shortage, prices will rise enough that demand will be reduced, most likely in the form of lower exports. The market has a tendency to regulate demand enough to prevent any serious risks, so I believe that the potential of a shortage has already been built into the current wheat prices.

Do you expect wheat production levels to remain constant going into next year? Are there any factors that might spur reduced production or higher production?

Usset: The challenge for wheat is in competing grains, namely corn and soybeans. Look at the expansion of corn and soybean acres in the western Corn Belt, primarily North and South Dakota, and in Kansas. It is simple economics. What would you prefer to produce: 50-bushel wheat worth $8/bu., or 120-bu. corn worth $6/bu.? The same math goes for 35-bu. beans at $13/bu.

Williams: Assuming no changes in expected growing conditions between now and next year, wheat production should be up for the 2012-13 crop year. An additional 1.3 million acres of wheat is expected to be planted next year, with the majority of the winter wheat already in the field. I don’t think we will see much of a change in the expected acreage for next year.

The one factor that we always have to keep an eye on is the weather. If the drought in the Midwest and Southern Plains persists or worsens, yields could be reduced and harvested acres will be lower. On the other hand, if we see more moisture this winter and spring, we will likely see increased yields and higher production.

What other comments would you like to make?

The above shows why the wheat market has a friendly tone for prices. As good as wheat prices are, in the months ahead, analysts will focus on the incentive to plant more corn and soybeans in 2013.

Williams: I think the main thing to keep in mind looking into the next year is that Mother Nature will play a major role in determining what the wheat crop will look like next year. A perfect example of how the weather impacts our outlook on a particular crop can be found in corn this last year. At planting time, growing conditions looked favorable, and we were expecting a record corn crop. As the summer progressed, the Midwest was hit hard by a drought, and we are now seeing the smallest corn crop since 2006.

We could see the same thing with wheat, but on the other hand we could see very favorable conditions and have a great crop, as well. Ultimately, weather is the wildcard in determining exactly what next year’s wheat crop will look like.

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