Wheat farmers and traders have been scratching their heads about a phenomenon rarely seen in the wheat market: Soft red winter wheat in Chicago is trading at a premium to hard red winter wheat in Kansas City.
Hard red winter wheat (HRW), which has about 10% to 13% protein, normally trades at about a 30-cent to 50-cent premium to soft red winter wheat (SRW), which has a lower protein content of about 8.5% to 10.5%.
But since wheat harvest this summer, the price relationship between the two winter wheats has been turned on its head. SRW now trades at a steep premium to HRW, with the premium continuing to climb. December Chicago wheat as of Monday was $4.92/bu., while December Kansas City wheat traded at $4.63¼/bu., which is a 28 ¾-cent premium for SRW over HRW. High-protein hard red spring wheat traded in Minneapolis, meanwhile, still is priced at a premium to SRW in Chicago at $5.03/bu., on the December contract.
Driving SRW’s rally against HRW is the serious shortage of quality SRW supplies this year while HRW inventories are abundant because of its weak export pace, according to Steve Mercer, vice president of communications at U.S. Wheat Associates.
“Soft red winter had really serious quality issues in many areas,” he says. “So exportable supplies, or milling quality supplies, of soft red winter are much lower than the actual production.”
The abundant rains that fell across the Midwest this summer where SRW is predominantly grown also caused vomitoxin levels to spike above the 2 ppm allowable level for milling purposes, Mercer says. Even more rainfall followed into harvest, causing further problems with milling quality as test weights dropped. The 5-year-average test weight for soft red winter is 58.7 pounds/bu., but fell to 56.9 pounds/bu., this year, he says.
Because of the extreme shortage of quality milling wheat, the market is now searching for quality SRW milling wheat via a significant price incentive.
“In order to get wheat that meets the standards, it costs a lot to find that wheat. The market’s looking for that, but it’s struggling to get it,” Mercer says. “The milling quality supplies of soft red winter are relatively low compared to production and the domestic markets are picking it up as quickly as they can. That lowers the supply, and that means the price of milling quality wheat goes up.”
Darrell Holaday of Country Futures in Frankfort, Kansas, says SRW millers in the eastern U.S. likely will not take advantage of the cheaper HRW, which is predominantly used for bread flour. Some blending might occur, but will be limited since HRW has a higher protein content, he says.
“Most of those soft red winter wheat mills are milling flour for specific customers who don’t want protein,” Holaday points out. “They want 9% protein for making a cake flour or a cracker. They have no desire for 12% protein wheat.”
Transporting hard wheat from the plains to the East Coast is also cost-prohibitive. “Do the math on that and you’ll figure out as soon as it lands in your mill over there that it doesn’t work,” Holaday says. “They don’t necessarily desire protein, and they certainly aren’t going to desire it if you’ve got to ship it that far.”
How long will SRW remain priced over HRW? Holaday predicts SRW to a discounted price versus HRW in 2016 if the new SRW crop yields well and doesn’t have the weather challenges like it did this summer.
“If we can come back and get trendline yield or higher, that would solve this problem, and you would probably see that premium go away,” he says. “But I think it’ll stay there through new crop.”
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