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Market Advisor: Large Crops and Low Prices Create Marketing Challenges - Part II

The wheat market is shifting focus quickly away from supply issues and toward demand considerations.

By Frayne Olson, Crops Marketing Economist

NDSU Extension Service

Harvesting fields with high yields and good quality brings a feeling of pride and satisfaction to most farmers, especially when the spring planting season was a fight against rain and mud. However, seeing the current prices posted at the local elevator can shift a feeling of satisfaction to one of frustration very quickly. The frustrations are compounded when discounts are applied and the potential sales price falls further.

What caused such large drops in crop prices from this spring, and when will prices improve? The answer to the first part of this question can be explained because we can look back in time and see the changing events that influenced prices. However, answering when prices will improve is very difficult because we must anticipate events in the future.

This is the second in a two-part series looking at the market conditions and marketing strategies for barley and spring wheat. The first part discussed the malt and feed barley markets, while this article will discuss spring wheat market conditions.

The wheat market is shifting focus quickly away from supply issues and toward demand considerations. The current estimated U.S. all wheat stocks to use ratio is a comfortable 33.5 percent, which is above the 15 year average of 26.8 percent. Both the U.S. and world wheat producing regions had another good year. The U.S. is expected to harvest a near-record corn crop and a record soybean crop. In short, there is a plentiful supply of wheat and the risk of a short corn or soybean crop are fading with every new weather forecast.

Because of the plentiful supply, domestic and international wheat buyers are purchasing only the amounts needed to meet short term needs and they are shopping around to find the best value. Wheat futures have been a price follower to corn and soybeans for the past two months because of the greater uncertainty surrounding varying yield estimates and weather forecasts.

Domestic wheat consumption is relatively stable and usually increases at approximately the same rate as the increase in U.S. population. However, export sales and feed consumption can change substantially from one year to the next. Very low quality wheat normally flows into the feed channels and must be priced competitively with corn and other feed grains. This means that the international market is a key variable for influencing price direction and price volatility for higher quality wheat.

As noted earlier, there is an ample supply of wheat available in the international market and buyers are shopping around for the best value. Currency exchange rates and shipping costs have a significant impact on the final price paid by an international buyer. Fortunately, ocean freight rates have dropped substantially in the past 12 months and are expected to remain low. The value of the U.S. dollar should be monitored as an indicator of how competitive U.S. wheat will be priced on the international market. As the value of the U.S. dollar decreases, the interest in U.S. wheat should increase.

The final issue dominating discussions about wheat are the protein premium and discount schedules. On average, the hard red winter wheat and soft red winter wheat crops had good test weights and high falling numbers, but below-average protein levels. In addition, current reports indicate that the average hard red spring wheat protein levels also are below average. The lack of high-protein wheat has caused the protein premiums and discounts to increase substantially.

A review of the past 10 years of prices for 13 percent, 14 percent and 15 percent protein hard red spring wheat sold at the Portland, Ore., terminal market show that the protein premiums and discounts increase and decrease together and follow a distinct pattern. The protein premiums and discounts tend to be mirror images of each other because as premiums become larger, the discounts also become larger.

Protein premiums and discounts tend to make rapid adjustments during the hard red spring wheat harvest, but then stabilize and trade in a relatively narrow range. These premiums and discounts do not adjust to new levels until the quality reports for the next year's spring wheat crop become available. This pattern is driven by the need for 14 percent protein hard red spring wheat in the milling and baking industries, both domestically and internationally.

This review also shows that the current discounts and premiums are following a similar pattern to those experienced in 2004 and 2008, but at larger levels. The protein discounts in 2004 and 2008 made rapid adjustments downward during harvest, became slightly less aggressive during late October through November, but then drifted slightly lower again until the new crop spring wheat harvest. The protein premiums followed a similar pattern. The premiums increased rapidly during harvest, were stable until mid December, increased slightly in January and then stabilized until the next spring wheat harvest.

The expectation is that the premiums and discounts for spring wheat between 13 percent and 15 percent protein will follow a similar pattern. However, the discounts for very low protein spring wheat (below 12.5 percent) may soften later in the marketing year if the domestic and/or international milling and baking industries begin using low protein hard red spring wheat as a substitute for hard red winter wheat. Tests are being conducted at NDSU to determine the baking characteristics of this year's low-protein hard red spring wheat. The North Dakota Wheat Commission and U.S. Wheat Associates are funding a large portion of the research.

To summarize, the base price for 14 percent protein spring wheat will be heavily influenced by competition in the international wheat market and the ability of the U.S. to remain competitively priced. The value of the U.S. dollar and the export sales pace for winter and spring wheat will be key factors to watch for general price direction. Protein premiums and discounts are not expected to change substantially until the quality of the 2010 spring wheat crop is known. The discounts for very low-protein spring wheat may soften if the milling and baking industries are able to use the low protein spring wheat in their flour blends or possibly as a substitute for hard red winter wheat.

For more information, visit my Web site at http://www.ndsu.edu/cropeconomics.


NDSU Agriculture Communication

Source:Frayne Olson, (701) 231-7377, frayne.olson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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