There really wasn’t anything changing fundamentally for the spring wheat market, but other factors contributed to the market softening just a bit as harvests wrapped up.
“There wasn’t anything major fundamentally that had shifted to impact the market, but just some of the psychology of the overall U.S. economic markets, equities and stock markets, some of the trends there have been more volatile in September with ongoing uncertainty over COVID-19,” said Jim Peterson, marketing director for the North Dakota Wheat Commission.
“Plus, we’re also having favorable weather for the corn and soybean harvests and both are making good progress and coming off quicker than what was anticipated, so that tends to add a little more pressure to the overall market complex,” he added.
As far as wheat fundamentals, the “big picture” is there is still a pretty large world wheat crop, although there is some tightness in parts of Europe, as well as off and on again rumors that Russia’s situation is getting a bit tighter, he noted. That’s largely based on the premise that it’s pretty dry there as they’re putting in next year’s crop, and that may be putting a little more tightness in the market with more value being placed on 2020 stocks.
“Argentina has also been a bit dry, so there are some positives that tend to support the wheat market, but the headwinds are still pretty ample for world wheat supplies,” he said.
Breaking that down further into the U.S. spring wheat situation, Peterson explained it’s not an overly tight market for buyers, so when the market allies, it seems those rallies tend to be short-lived.
Looking at current price levels, the National Spring Wheat Index was down to about $4.95 as September was coming to an end. The high point was in mid-September when prices were in that $5.20-$5.25 range, so the market has lost about 20 cents from those recent highs. Local prices ranged from as low as $4.50 in some western parts of the region up to $4.95 in the eastern part.
Peterson explained that most of the decline has been in the futures market, while basis has held relatively stable.
“Across the region the basis is actually a little stronger than what we have been the last 2-3 years,” he said. “Producer selling has been somewhat slow, but I think as we go forward one thing that not only affects wheat, but all commodities, is that October looks to be a pretty tight freight period and that probably rolls into November. We have a lot of export sales on the books – wheat, corn, soybeans to China off the Pacific Northwest (PNW) – and railroads have been struggling to bring employees back online, as well as rail power since the major slowdown earlier this spring and summer due to COVID-19.
“So the rail cost to move product from the Midwest to the export points, or even domestically, has gone up and that extra cost is borne by both customers and producers,” he continued. “But, unfortunately, producers probably bear more of the brunt of that. It is not increasing tariffs from railroads, but rather the secondary market, or competition between shippers for freight driving the higher cost. Hopefully that will ease either if we get more rail cars into the system or faster service and delivery from the railroad, which will ease some of that tightness in the secondary market.”
Looking at spring wheat more specifically, harvest is essentially done, although there are a few pockets left. The most recent quality report, which is based on more than 90 percent of the expected harvest samples, shows that spring wheat protein is at 14.4 percent, which is equal to 2019 and the five-year average, but it’s down from the early harvest numbers, which were around 14.8, so producers are pulling off some lower protein into parts of Montana and northern North Dakota with the later harvest.
Test weights have held in very well and are above last year and the five-year average. Total defects are also lower than a year ago and falling numbers are higher.
The one area that is a bit surprising is the DHV or color of the crop, according to Peterson. “While it’s certainly improved from a year ago, we’re still running lower than the five-year average,” he said. “Producers really haven’t had to deal with a lot of rain at harvest. Whether that’s a varietal influence or what, I’m not sure, but it’s somewhat surprising to see that a little bit lower than the five-year average.”
Looking at proteins across the region, the lowest protein average so far is 13.6 percent in Montana and Minnesota is 13.8 percent, both of which are lower than last year. North Dakota is still holding at 14.9 percent, which is higher than a year ago, and South Dakota is at 15 percent which is equal to last year.
“We are starting to see some protein spreads come back into the market, especially in the northern part of the region where there is some lower protein crop. It’s certainly not dramatic, but it’s a bit more than we had in the early harvest,” he said.
The market is still expecting pretty strong demand for U.S. spring wheat from domestic mills. But one tempering factor might be that the final hard red winter protein is now pegged at 11.9 percent. That compares to 11.3 percent last year and the five-year average of 11.7 percent, so domestic mills may not need quite as much hard red spring wheat to boost protein as initially thought. That said, Peterson expects there still will be good demand from domestic mills.
On the export side, U.S. export sales continue to be very strong. The U.S. has 492 million bushels (MB) sold this year compared to 463 MB a year ago, an increase of about 6 percent and ahead of USDA projections. By class, hard red winter, hard red spring and soft white wheat are all ahead of a year ago in terms of sales. Hard red winter is running about 6 percent ahead and hard red spring is running 14 percent ahead of last year’s pace with 143 MB sold vs. 125 MB.
“We’re seeing both stronger shipments made already as well as sales on the books, so that’s a positive” he said.
A big boost this year is the Philippines continue to be the number one buyer of U.S. spring wheat and sales there are ahead of last year’s pace. The U.S. struggled last year with sales to Japan and this year sales there are already 35 percent ahead. The U.S. also has about 12 MB in sales to China, which is well ahead of last year making China a top five buyer. China has purchased a lot of hard red winter, as well but certainly is a big buyer of spring wheat this year.
Where the U.S. is struggling a little bit is in South and Central America, as well as parts of Europe. Hopefully that will shift moving forward.
A big challenge for the U.S. this year will be the Canadian crop, which was a strong yielding crop in 2020. They’re only about 70 percent harvested.
“I do think they have some pockets of quality issues as some of it did get some frost damage,” Peterson said. “They did have some that got a little bleached and some pockets of lower protein. There’s still not a lot of data available, but certainly Canada is going to be quite competitive once they get their crop conditioned for market. Depending on protein, that will determine which markets they are more competitive in.”
USDA was to release its Small Grains Summary Report the end of September and that will be closely monitored. Private analysts expect that USDA may adjust spring wheat yields in some states due to late season heat, but that remains to be seen.
“The harvest is quite variable in terms of yield across the region this year so we’ll see what the report shows when it comes out,” he said. “That’s kind of the expectation – that they may reduce U.S. production slightly from the August estimate.”
Currently, U.S. producers are planting their 2021 hard red winter wheat crop and already have about 35 percent planted, which is ahead of last year and the long-term average. So far, there have been no major delays or issues.
A factor that is becoming a concern in some areas, especially in parts of Montana, South Dakota, Nebraska and Kansas is some pretty dry soil conditions. It is yet to be determined that if it continues to get drier whether that will impact emergence, or if it stalls out planting. As of right now, there are no major concerns or market impact from that, but it certainly could become a larger market factor.
“With that, we’ll wait and see if we can continue to keep our export sales running ahead of projections, which is positive for prices, and see how the rail freight situation unfolds in October/November,” Peterson said. “Some elevators are already full so we may see some challenges with getting products delivered if market prices would rally and we see increased producer interest in selling. So far, the market seems to like the level of where it’s at in that $4.50-$5 range for the time being.”