A “tremendous amount” of uncertainty exists about what the U.S. production and consumption will be for the upcoming crop, according to Frayne Olson, NDSU Extension crop economist and marketing specialist.
The first World Agricultural Supply and Demand Estimates (WASDE) of the year came out in May, so July is the third USDA forecast for the crop currently in the ground and the first report to give an average trade estimate of wheat by class (hard red winter wheat, soft red winter wheat, white wheat, other spring wheat and durum).
“Up until this point, USDA has been estimating wheat in a larger sense (all-wheat), but in the July WASDE, we start breaking it down specifically by class by state,” Olson said. “This is also the first estimate of wheat production numbers – the amount of bushels of wheat that are going to be produced.”
In the July WASDE, trade estimates for all-wheat production came in at 1.835 billion bushels (BB), while the USDA numbers for July were lower at 1.746 BB.
Ending stocks for all-wheat are showing they will be tighter.
The average trade estimate in all-wheat ending stocks was 729 million bushels (MB), while the USDA numbers for July came in at 665 MB.
Will those tight numbers lead to higher prices?
“When we start breaking it down by (wheat) class, we see differentials, and differentials in production are playing out right now in the relative prices we see for the different wheat classes,” he said.
Olson has been getting calls this month over how high spring wheat prices could go.
But there is still a lot of winter wheat supply in the world.
“The challenge we are facing is spring wheat, even though the ending stocks are going to be tighter and production will be down, we still have a larger winter wheat crop out there,” he said.
The trade estimate for hard red winter wheat was smaller at 786 MB than the actual USDA reported value of 805 MB.
“Reports in Oklahoma and Kansas are that yields are strong; quality profile is good and average protein is a little lower than what we would typically see, but not bad,” he said.
Soft red winter wheat was “a little bit of a surprise.”
While the trade estimates were 340 MB, the USDA reported value came in at 362 MB.
“When we look at our wheat numbers, we have more than was expected. With soft red, we are starting to rebuild inventory, giving us a better buffer in the soft red markets,” he said.
The trade was expecting more of a cut in white wheat (205 MB), primarily due to the dry conditions in the Pacific Northwest, where there is a lot of white wheat grown. The white wheat USDA numbers were 237 MB.
The spring wheat numbers were not necessarily a surprise, but durum was a “shocker” and prices are starting to rise in the durum market.
The trade estimate came in at 459 MB for other spring wheat and 56 MB for durum.
“The average trade was expecting a little higher numbers than what we actually got,” he said.
The actual USDA numbers came in at 345 MB for spring wheat and 37 MB for durum.
“My personal opinion is USDA came pretty close to the right numbers from talking with farmers and county Extension and what I saw personally,” he said.
Olson explained that the markets are starting to “get a read on what the production numbers will be” and uncertainty seems to be the theme.
“In my drive across the state out to western North Dakota, I saw a lot of variation from decent to terrible,” Olson said. “Given this wide variation in crop condition, it is playing into a level of uncertainty.”
Durum is one of those wheat classes that only a few forecasters actually take on, but from the few reports, it looks like durum stocks will be tight.
“The moral of the story is that our durum stocks are going to be pretty tight. As I listen to and try to study what is going on in Canada with spring wheat and durum production, they have gotten more rain, but there is still a smaller crop in Canada, too,” he said. “This is setting the stage for overall wheat prices in the wheat complex, but also what is the relative price differences between these classes (of wheat).
Olson looked at the changes in the stocks-to-use ratio for corn.
“Stocks-to-use ratio looks at what percentage of our total needs are we going to have in reserve just before harvest,” Olson said.
As a percentage, old crop corn looks “very similar” to what was seen in 2013-14, which was low.
“But it is not the record low percentages that we saw in 1994-95,” he said.
“One of the reasons the corn market is having an up and down personality here is because we’re getting this divergence between old crop and our expectations.”
Assuming there will be trendline (national) yields for corn, the stocks-to-use ratio would be down – just not a record.
“The trendline yield is just under 180 bushels per acre national yield,” Olson said. “A lot of people are starting to ask some questions on if those yields are achievable given the dry conditions we are seeing, especially in the western Corn Belt.”
From now until the combine runs – when there will be actual yield reports – there will more than likely be very differing opinions on what the size of the crop will be and what the yield potential will be.
“Even though it looks like we will be rebuilding some of this inventory, that is being hotly debated right now whether that will happen or not,” he said.
What tends to happen is when that ending stocks number gets tighter, two things happen: prices will increase and prices will become more volatile and more variable.
“Be paying attention to the weather and any discussion about the yield and crop stress, especially when we get into the reproductive stages of corn,” he added.
The stocks-to-use ratio for new crop soybeans is also low, below what is was in 2013-14.
“It is a tiny increase over old crop supplies, but we are exceptionally tight on our soybean supply/demand situation,” Olson said.
It also assumes the U.S. meets the trendline yield, which is slightly less than 51 bushels per acre nationally.
“The same questions are going on for soybeans. Given what we see happening with weather forecasts, soil moisture conditions, and crop development, do we really have the potential nationwide to be able to see that occur?” he asked.
Wheat and the price spread
For all-wheat, 30-35 percent stocks-to-use ratio is about what Olson expects in the modern era.
“It is toward the lower end of normal, but we are not near the record lows we saw in 2007-08. Everyone remembers the price fighting and the high prices for durum for a week or so in spring 2008. But that was an anomaly,” he said.
Spring wheat yield numbers are lower and it is tightening up our hard red spring wheat supplies.
How high can spring wheat prices go? Spring wheat is unique, unfortunately for farmers. Prices depend on how the winter wheat market is doing, as well as how the corn market is doing.
“You cannot look at spring wheat independently of winter wheat and corn,” he said.
Spring wheat is a smaller market than the other wheat classes and other commodities.
Looking at the price spread between winter wheat and spring wheat, Olson pointed to the difference in futures prices on July 15 between Minneapolis spring wheat and Kansas winter wheat.
“If we look at (what has happened in price differential) 2010 forward, we are (already) getting to the top of the price differential,” he said. “Spring wheat can only separate itself so far from winter wheat, which is a larger wheat class.”
From 2010 forward, the price spread grows about $2.50 and then it starts to contract. What that means is winter wheat will either be pulled along with spring wheat or spring wheat prices will drop.
“We have adequate, large supplies of winter wheat, and in the global winter wheat market, there is plenty of winter wheat supplies,” Olson said. “We have stiff competition from Russia.”
The biggest concern in the hard red winter wheat market is what is happening with corn prices.
If corn prices get too high, and the winter wheat market doesn’t stay at a premium relative to corn, then Olson says we’ll have to start feeding more corn, in particular in the poultry sector.
If there is continued strength in the corn market, that should help the winter wheat market increase.
“That would allow the spring wheat market to move up. It sounds like a complex set of relationships, but in today’s market, that is really what we are seeing,” he said.
U.S. Drought Monitor
Producers in North Dakota tend to focus on the western Corn Belt, which include Nebraska, Iowa, South Dakota, North Dakota and Minnesota.
“We’re getting separation between the eastern Corn Belt and the western Corn Belt, which is west of the Mississippi River. The eastern Corn Belt has been getting rain and their crop condition is good,” he said. “We could compensate for the western Corn Belt with good yields in the eastern Corn Belt. That would not help prices.”
Olson used the USDA Office of the Chief Economist lockup briefing to point out the vegetative index (how green the crop is).
“It traces well with the U.S. Drought Monitor, but not identically,” he said.
The markets are watching the southern Minnesota/northern Iowa area, which is showing some abnormally dry to moderate drought conditions.
“There are parts of those regions that are starting to get dry. When we get into pollination for corn, as well as flowering for soybeans, this will become pretty critical,” Olson said.
Markets closely follow and utilize the weekly USDA Crop Progress Report.
What percentage of the crop is good-to-excellent versus what percentage of the crop is having issues?
“We look at it this week this year compared to this week last year. When we compare corn crop condition (in the 18 corn states), the numbers were not dramatically different,” he said.
For soybeans, it is a similar story. North Dakota’s crop may be having issues, but that does not translate out to the rest of the soybean states.
Meanwhile, the markets will be watching spring wheat in North Dakota.
How many of those kernels in the head are shriveled and broken? How many heads will make it to harvest? Are the yields harvestable? Will grain go to feed?
“We are going to continue to see a lot of market volatility as we go through the upcoming weeks until harvest,” Olson concluded.