Friday, March 18, 2011
Can The Wheat Market Recover?
Old and new crop wheat contracts have been on a major roller coaster for the past 5 weeks, losing at least $2.50 and regaining about 70¢. Wheat values took a major hit earlier in March when USDA’s supply-demand report increased global production, lowered consumption, and raised ending stocks. Such a triple whammy was painful, particularly in the wake of dismal yields anticipated on millions of acres across the Plains states where moisture has been in short supply.
USDA’s March Wheat Outlook report indicates US old crop exports fading in the wake of expected foreign competition, although the US will export about 400 million bushels more than in the prior year, and the most since 1993. When USDA trimmed export projections back from 1.3 billion bushels, stocks were raised to 843 million bushels. That is still 133 million less than the prior year but 537 million bushels above the recent low stocks level in 2007/08.
Part of the reason for the reduced level of exports is the anticipation of larger global production than previously estimated. USDA has raised global production estimates by 2.2 million tons to 647.6 million for the current marketing year. Interestingly, part of the increased production came from Saudi Arabia, where a governmental decision had been made several years ago to ratchet down production. The past two years the production was less than planned, so the farmers boosted their production this year with the help of guaranteed prices and production quotas.
Along with the higher global production is lower global consumption. USDA is forecasting use at 663 million tons, which means the large global stocks will not be drawn down as fast. The lower use does not indicate fewer people or less hunger, but a change in how the data is calculated. There is some degree of softer demand, focused on feed use in Russia. Their livestock industry is not growing as fast, and swine numbers are down because of African swine fever and some of the inefficient producers are reducing herds to save on production costs. 50% of Russian pork comes from large complexes, but other half is from smaller producers.
Prices have also been affected by the unsettled problems in the Middle East which is a major wheat market, as well as the tragedies that have struck at Japan, where wheat is also an import commodity. With import purchases currently on pause in both areas, traders have taken the premium out of the wheat market.
In the wake of the global dynamics resulting in larger stocks, is the meager crop being raised in major US wheat growing areas.
Kansas: 25 percent of the current Kansas wheat crop is rated good to excellent compared with 60 percent a year ago at this time. Forty percent of the current Kansas crop rated poor to very poor, up from 8 percent a year ago.
Nebraska: Forty percent of the current wheat crop in Nebraska is rated good to excellent compared with 49 percent a year ago. Thirteen percent of the Nebraska crop is rated poor to very poor compared with 8 percent a year ago.
Oklahoma: 22 percent of the crop this year rated good to excellent at the end of the first week of March, compared with 65 percent a year ago. Forty-one percent of the Oklahoma crop rated poor to very poor, while only 7 percent received that rating a year ago.
Texas: Eighteen percent of the current Texas wheat crop on March 6 is rated good to excellent compared with 45 percent a year ago. This year, 56 percent of the Texas crop is rated poor to very poor compared with 18 percent a year ago.
The bright spot in the wheat market may be in the soft red winter wheat crops in Illinois and North Carolina. USDA says, “Thirty-six percent of the current Illinois wheat crop is rated good to excellent compared with 28 percent a year ago. This year 18 percent of the Illinois crop is rated poor to very poor compared with 23 percent a year ago. Fifty-nine percent of the current North Carolina wheat crop is rated good to excellent compared with 17 percent a year ago. This year, 8 percent of the North Carolina crop is rated poor to very poor compared with 47 percent a year ago.
Summary:
US wheat producers have seen old and new crop market prices decline substantially in the past week, since USDA reported increased carryover, but also since politics in the Mideast and the natural disasters in Japan have occurred. Globally, more wheat will be produced in the coming year, despite rather dismal crop prospects in many US states. Overall global production will be up, exports will be down, and stocks will be up, which is not a friendly formula for US wheat prices.
Posted by Stu Ellis on 03/18 at 12:00 AM | Permalink
Comments
Posted by: Jib at March 18, 2011 2:02PM
Extrapolation of cheap DDGS to more wheat feeding
(Extrapolation is defined as the process of inferring (an unknown) from something that is known; conjecture.)
Wheat generally has higher protein content than corn. In the calculation of ration cost, this high protein level has helped to the keep wheat more competitive than corn. Some have projected a decrease in wheat feeding because of “cheap” DDGS. DDGS are trading under 80% of corn on a dry matter basis. This provides a low cost source of protein for livestock diets; mitigating the higher protein advantage of wheat. This could result in wheat trading on a comparable level with corn as an energy resource. (My calculation has that number at 109.7% of corn on a per bushel basis when adjusted for test weight and moisture content of a standard bushel. That assumes wheat can be “freely” substituted for corn in a diet that includes DDGS.)
Now the speculation. Wheat can be included in swine rations at 100% of the energy needs. DDGS are limited to around 40% because of the “soft belly” effect of to much unsaturated fats in the diet of market hogs. Wheat has less than half the oil content of corn. Could the level of DDGS in a finishing hog ration be increased with wheat as the energy source rather than corn? Again my calculations, which are always subject to suspicions, indicates a 20% DDGS ration with corn could go to a 54% ration with wheat and maintain a 5.25% fat contain. No feeding trials were found that included wheat and DDGS, so the performance of the animals is unknown. But if this ration is “doable” the “low priced” DDGS could be supportive to wheat. (It also indicated to potential benefit of pre-treating corn to remove the oil prior to fermenting into ethanol. The lower oil content in the resulting DDGS may be supportive to its price.)
The Midwest soft red winter wheat appears to be loosing export market share to soft white wheat of the Pacific Northwest. Their crop yields and shipping cost to Asia has us at a disadvantage. Also some markets prefer white wheat to red because it hides their milling errors. The export market to Europe out of Toledo has all but dried up. They are growing soft red winter wheat in supplies that results in them being a net exporter. A market our double cropping Southern friends may wish to reach is the cattle feeding market of the Southwest. There appears to be a limit to hard red winter wheat in the finishing ration. The way the wheat is digested in the rumen seems to be the factor. Soft white wheat does not appear to have that problem. May be soft red can fill that bill as well.
My extrapolations indicate wheat price can be supported by tight corn supplies if wheat can find more “room” in feeding rations. More research is needed to maximize its use. The tight corn supplies and wide wheat basis might make that research worthwhile for soft red winter wheat growers and livestock folks alike.
Jib aka Gibberish