U.S. wheat acres sit at a 100-year low. A new Rabobank report points to the following six key issues it says that industry players should consider during strategic planning.
1. A smaller U.S. acreage base has also shrunk the supply cushion, which is more vulnerable to effects of drought and other “supply shocks.”
2. End users are more likely to find it difficult to procure desired volume and quality of U.S. wheat, relying instead on a periodic need for imports or alternative supply arrangements.
3. Increases in imports will in turn generate longer supply chains and increased costs.
4. Changes in wheat supplies and qualities will increase volatility of price spreads between wheat classes. Expect escalated protein premiums for end users.
5. Spreads between classes could exceed historic levels more frequently.
6. Smaller acreage base plus variable weather in the Great Plains could increase volatility of basis levels (which can make effective hedging on futures exchanges more difficult).
Will U.S. farmers realize higher wheat prices due to these factors?
Futures are trading back above $5 a bushel, but Rabobank says there’s a 75% probability prices stay below $6 per bushel. Even in a drought scenario, there’s a 95% probability prices stay below $7.50 per bushel, according to Rabobank.
“Only extreme supply constraints – not only in the U.S., but also in other key producing regions of the world, like the Black Sea region – would push (with a 5% likelihood) prices beyond this level,” the report concludes.
On average over the past 30 years, droughts push HRW wheat yields at least 15% below trend, according to Rabobank.
Click here for more insights on the U.S. wheat industry from Rabobank.