When many U.S. consumers think about wheat, they visualize a loaf of bread or cereal. But in years of plentiful global supplies such as this one, though, the crop’s price often is determined in the animal feed market, especially domestically. So what does wheat need to do to push its way into feed bunks?
To answer that question, producers should look first at the demand side for 2014/15 wheat and then at the supply prospects for 2015/16 wheat. In April, USDA did not change its 2014 production estimates. It left hard red winter at 738 million bushels; soft red winter at 455 million; and winter white at 184 million bushels. Hard red spring is at 556 million bushels while durum is at 53.1 million.
Although in April USDA tightened all-wheat ending stocks for the current marketing year to 684 million bushels—down from 691 million in March—that is still ample at 33% of expected use.
“The supply and demand situation in wheat is not bad; some even argue [it is] modestly bullish,” says Kim Anderson, Oklahoma State University ag economist. “The problem is corn. We think of wheat as a food grain, and it is, but worldwide I believe that about 15% to 20% of the wheat produced is used as animal feed. In feed markets, wheat and corn are substitutes. So we are back to corn, and corn, as they say, is king. If the corn market is on the defensive, wheat prices will have a difficult time going higher.”
Total 2014/15 ending stocks are expected to be up 16% from 2013/14. Meanwhile, USDA has lowered exports by 20 million bushels to 880 million, the lowest export total since 2009/10. Feed and residual use was boosted 10 million bushels due to finding less than expected stocks in the Grain Stocks report, implying greater use.
USDA pegs the 2014/15 season-average farm price for wheat at between $6 and $6.10 per bushel, down from $6.87 in the previous marketing year.
Export Prospects Generally Dim. It is no secret the U.S. has been losing wheat market share, a trend that has accelerated with the appreciation in the dollar. Canada’s record crop this past year, a growing crop in Ukraine and stiff competition from Europe, especially France, have all eaten into potential export markets. U.S. producers benefited in 2014 from huge exports to Brazil because of a poor Argentine crop, but that is over.
USDA sees this season’s exports at just 15% of the global total, the lowest ever in USDA’s database. At the same time, the European Union will be the top exporter for the second year in a row as it sets a new record. For the first time on record, Canada’s exports are expected to match those of the U.S. Russia’s exports are projected higher, despite its export tax. The ruble’s collapse has made its wheat less expensive.
Wheat Exports By Class, 2013 to 2014 (via USDA)
Profitability Worrisome. The Prospective Plantings report shows additional reductions in U.S. acreage in 2015. The all-wheat estimate stands at 55.4 million acres, a 3% drop from a year ago. Yet several classes show small increases, most notably durum. Some analysts think the spring wheat numbers might actually be too low. The truth won’t be known until planting season is over, and both weather and the markets are sending messages.
“Spring wheat has not yet been planted and may still be competing with other crops for acres,” explains Brian Williams, Extension ag economist at Mississippi State University. “As of March 31, USDA is projecting 13 million acres of spring wheat to be planted.”
Additionally, while basis has improved somewhat with lower rail costs, those gains are not enough to offset a slide in futures prices.
“I would say most producers are disappointed in current price levels for their 2014 wheat harvest, and also disappointed in the 2015 harvest price outlook,” says Jim Peterson, North Dakota Wheat Commission. “Both prices are below the cost of production. In 2014, we did harvest record to near-record yields. But even with that, most wheat producers will likely fall below needed revenue levels to cover production costs.” That means it’s possible not all of last year’s prevented planting acres will return to production this year.
Dryness is allowing northern farmers to get into the field much earlier than recent years, which could encourage additional corn or soybean planting. On the other hand, wheat is more drought tolerant and has lower input costs.
“Producers already are out seeding,” says Fryne Olson, North Dakota State University crops economist and marketing specialist. “Early planting means that spring wheat has a chance to mature before the typical dry and hot July weather, promising pretty good yields. But we don’t have the soil moisture level of the past few years, so it will mean this crop needs timely rains through the growing season.”
Wheat Acres, 2014 And 2015 (via USDA)
Wheat production worldwide for the current marketing year has been revised upward to 726.5 million metric tons (MMT), compared to 716.8 MMT this past year. For details of revisions, see page 15 here.
“Globally, there are no real concerns today; supplies certainly are adequate,” says Mark Welch, Texas A&M Extension economist. “Near-term, at least, the global situation is not friendly for U.S. prices.”
Wheat Marketing Strategy: Grab Nickels And Dimes. With the winter wheat harvest not far off, producers must review their marketing strategy to preserve profitability.
“We’ve been seeing some better-than-average basis for both current delivery and harvest contracts,” Welch notes. “In this market environment, nickels and dimes can be significant. We suggest producers have a discussion with potential buyers.”
Capturing protein premiums is another way to garner some extra nickels and dimes or more. Protein scales in North Dakota now offer 10 cents per one-fifth point of protein, Williams points out. “Fifteen percent protein might be priced at about $6.15,” he says.
Remember that crop revenue insurance kicks in at about $4. “That means there’s still $1 in price risk,” Welch explains. “Even at these levels, you can better the price you get with some futures hedges, etc., to limit risk to the downside.”
Likewise, he says, some parts of Texas do not have an abundance of storage if the crop is a good one. “While this crop may not be as huge as what was harvested in central Texas in 2010, it is likely the best crop since then. There was a real mess due to lack of infrastructure. Communicate about your marketing and possible production. Even if you don’t sign a contract, having the discussion makes it more likely you’ll get the storage you need.”
Producers should know their breakeven to optimize profitability, Williams adds. “If they can lock in a profit by hedging or forward-contracting, they should definitely consider doing so. The price movement this spring will depend mostly on growing conditions and where the rain does or does not fall. If the Plains states remain dry, we could see wheat prices rise. If rain comes at the right times and can boost yields, we could see prices come down.”
In the end, as in pretty much every year, producers must balance economics and weather while hedging their bets. An outstanding supply or demand factor will not answer the market’s questions in 2015.