Wheat Prices Tumble from Record Highs as Wheat Harvest Expands
July 29, 2008
Scoular Senior Manager Bart Brummer Comments on Farmer Selling, Market Scenario
BAKINGBUSINESS.COM, Jay Sjerven — Wheat prices in the last several weeks fell sharply from all-time highs as the expanding Northern Hemisphere harvest bolstered forecasts for a bumper crop in the United States and record world wheat production in 2008-09. While wheat prices could move yet lower this summer, they were likely to remain historically high for the current year and perhaps for years to come because of relatively tight world stocks of wheat and other basic agricultural commodities in the face of rising demand.
The price of 12%-protein hard red winter wheat in Kansas City (based on the price of the basic K.C. wheat future and the cash premium applying to 12% protein) on July 18 was $8.86 a bu, down from a mid-March high near $14. A year earlier, the mid-July price of 12%-protein hard red winter wheat was around $6.30 a bu, and in 2006, it was $5.39 a bu.
Price movements in 14%-protein hard red spring wheat in Minneapolis were even more dramatic. The price dropped to $10.10 on July 18 from a mid-March high near $25 a bu. A year earlier, in mid-July 2007, 14%-protein hard red spring wheat was trading near $6.55 a bu and in mid-July 2006 traded near $5.64 a bu.
The cash price of soft red winter wheat in St. Louis on July 18 was about $6.14 a bu (based on the Chicago September wheat future and local mill bids onspot supply), down from $12.97 in mid-March and compared with $6.16 a bu in mid-July 2007 and $3.78 a bu in mid-July 2006.
U.S. wheat prices surged to all-time highs earlier this year for several reasons, but the most important was rapidly declining world wheat stocks in the face of increasingly urgent world demand. World wheat consumption exceeded production in 7 of the past 10 years. Production shocks such as two consecutive years of drought-reduced harvests in Australia helped push world wheat ending stocks in 2007-08 down to 116.05 million tonnes, the smallest level since 1981-82, when the world had 2 billion fewer mouths to feed.
With reduced exportable supply in Australia and other key wheat-producing nations during the 2007-08 marketing year, a world hungry for wheat increasingly turned to the United States for supply, helping push U.S. 2007-08 wheat ending stocks down to 306 million bus, the smallest since 1947-48. The market was not prepared to see U.S. wheat exports surge to 1,267 million bus in 2007-08, the highest outgo since 2000-01, in the face of record prices. The United States was the origin for 30% of the world’s export wheat in 2007-08 compared with 22% in 2006-07.
Farmers across the Northern Hemisphere responded to soaring wheat prices in 2007 and early 2008 by planting wheat heavily last fall and in the spring.
The U.S. Department of Agriculture on July 11 projected world wheat harvested area in 2008-09 at 223.87 million hectares (1 hectare equals 2.47 acres), up 6.53 million hectares, or 3%, from 217.34 million hectares in the previous year. It would be the world’s largest harvested area of wheat since 225 million hectares in 1998-99.
American producers planted 63,457,000 acres of wheat for harvest this year, up 5% from 60,433,000 acres last year. It was the largest area planted to wheat in the United States since 1998. The U.S.D.A. on July 11 projected U.S. all-wheat harvested area at 56,586,000 acres, up 5,575,000 acres, or 11%, from 51,011,000 acres in 2007. Harvested area in the United States also was projected to be the largest since 1998.
Yields in the Northern Hemisphere wheat harvest through June pushed average yield forecasts higher. The U.S.D.A. projected an average world wheat yield in 2008-09 at a record 2.97 tonnes per hectare, up from 2.81 tonnes per hectare in 2007-08.
As combines worked their way northward in the U.S. winter wheat states, the U.S.D.A. raised its forecast of the average U.S. winter wheat yield to 46.3 bus per acre, up 1 bu per acre from the June forecast and compared with 42.2 bus per acre in 2007. The initial yield forecast for U.S. spring wheat other than durum was 36.8 bus per acre, down slightly from 37 bus per acre in 2007 because of recent dryness.
The U.S.D.A. forecasts for 2008 U.S. wheat production and for 2008-09 world wheat production were raised in both June and July from the initial May projections.
The current U.S.D.A. forecast of U.S. wheat production is 2,461 million bus compared with 2,432 million bus as the June projection and 2,392 million bus as the initial forecast issued in May. At 2,461 million bus, the 2008 U.S. wheat crop would be 394 million bus, or 19%, larger than the 2007 outturn of 2,067 million bus and would be up 649 million bus, or 36%, from 1,812 million bus in 2006. This year’s crop would be the largest harvested in the United States since 2,547 million bus in 1998. The recent five-year average U.S. wheat outturn was 2,097 million bus.
U.S. winter wheat production was projected at 1,864 million bus, up 348 million bus, or 23%, from 1,516 million bus in 2007. If the projection is realized, the winter wheat crop would be the largest since 1998. Production of U.S. spring wheat other than durum was projected at 507 million bus, up 28 million bus, or 6%, from 479 million bus in 2007. It would be the largest other-spring wheat crop since 569 million bus in 2004.
The U.S.D.A. projected world wheat production in 2008-09 at a record 664.24 million tonnes, up from 662.9 million bus as the June forecast and up from 656.01 million tonnes as the initial forecast issued in May. The 2008-09 world crop was projected to be 53.47 million tonnes, or 9%, larger than the 2007-08 crop of 610.77 million tonnes and would be 68.07 million tonnes larger than the 2006-07 crop of 596.17 million tonnes. The recent five-year average world wheat outturn was 601.7 million tonnes. The world’s previous record-large crop was 626.15 million tonnes harvested in 2004-05.
“There’s an adage that big crops get bigger and small crops get smaller,” Joe Christopher, Crossroads Commodities, Sidney, Neb., said of the steady increases in the U.S.D.A.’s U.S. and world wheat production forecasts. “I don’t think we’ve seen the highest U.S. winter wheat estimate of the season, and some think the U.S.D.A. was too conservative in its latest world wheat forecast.”
The projected bumper harvests in the United States and other major wheat-producing countries should allow for an increase in stocks from critically low levels.
On the basis of forecast record world wheat production, the U.S.D.A. projected 2008-09 world wheat ending stocks at 133.06 million tonnes, up 17.01 million tonnes, or 15%, from the 26-year low of 116.05 million tonnes held in world stores at the end of the previous year. Even with the increase projected for the current year, world wheat stocks would remain historically low. The 2008-09 world wheat ending stocks-to-use ratio was projected at 20.6% compared with 18.7% in 2007-08. Last year’s ending stocks-to-use ratio was the lowest since reliable data began to be collected in 1960-61.
The U.S.D.A. projected 2008-09 U.S. wheat ending stocks at 537 million bus, up 231 million bus, or 75%, from 306 million bus at the end of 2007-08. The June 1, 2008, U.S. wheat inventory was the smallest since 1948. The U.S. 2008-09 wheat ending stocks-to-use ratio was projected at 23% compared with 13.2% the previous year. The 2007-08 ratio was the lowest for the U.S. since 1946-47.
Steve Freed, vice-president of ADM Investor Services, Chicago, said people who are market fundamentalists think wheat prices should continue to trend lower given the U.S. and world wheat crop projections. Additionally, some outside markets exerting influence on wheat have turned somewhat bearish as well, Mr. Freed noted. Most important, crude oil prices recently retreated from record-high levels approaching $150 a barrel, and corn futures prices dropped nearly 25% since late June.
Mr. Freed said the plunge in corn futures prices from all-time highs set in late June was a market response to subsiding Midwest floodwaters, which relieved some “worst-case worries” for fall production, benign weather patterns in key corn-producing states since the floods and slumping crude oil prices.
Another factor pressuring wheat prices was expectations the United States would face sharply increased competition in world wheat markets this year.
“There has been a slowdown in export demand with the Europeans offering lower prices,” Mr. Freed said. He pointed out the U.S.D.A. projected U.S. wheat exports in 2008-09 at 1,000 million bus, down 21% from 1,267 million bus in the previous year with exportable supplies projected to increase in nearly all of the other major wheat-exporting countries.
Paul Meyers, vice-president of commodity analysis, Connell Purchasing Services, Berkeley Heights, N.J., said if corn and oil prices continued to trend lower, wheat prices should continue to drop in the near term, perhaps to as low as $8 in the K.C. December future.
“Wheat prices wouldn’t have dropped as low as they have if corn prices hadn’t tumbled,” Mr. Meyers said. “If crude oil prices continue to decline, and corn goes down with them, the market psychology becomes much more bearish.”
Mr. Meyers said in most years the market expects to see the spread between wheat and corn prices narrow during the summer, when wheat supplies are at their maximum level and old crop corn supplies approach their lowest levels. Most wheat fed to livestock in the course of a year is fed during the several weeks between the wheat and corn harvests. Generally, it’s thought wheat prices should be trading not much more than $1 a bu above corn prices for significant volumes of wheat to be fed. But the current wheat/corn spread in Chicago (basis the December future) was more than $2 a bu and recently was widening, not narrowing.
Mr. Meyers expected the wheat/corn price spread to narrow, suggesting whether corn prices go up or down, wheat prices should decline. Wheat prices tend to follow corn prices during the summer. Downward moves in corn prices would exert a tug on wheat prices. He also pointed out spread traders who recently were selling corn and buying wheat, should they discern corn prices approaching a bottom, might begin unwinding their positions and begin buying corn and selling wheat.
Mr. Christopher said the market needs to feed large quantitives of wheat this year.
“If we don’t feed a lot of soft red winter wheat, we could double the 2009 carryovers,” he said.
The U.S.D.A. projected soft red winter wheat production this year at 607 million bus, up 69% from 358 million bus a year ago. The soft red winter crop would be the largest since 1981. While the Chicago wheat/corn spread was historically wide, anemic cash bids on soft red winter wheat, as low as 200c under the Chicago future in some areas, stimulated wheat feeding.
The U.S.D.A. projected 2008-09 feed and residual use of wheat at 285 million bus, up sharply from the possibly record low 20 million bus in 2007-08. If the projection is realized, wheat feeding in the current year would be the highest since 2000-01.
While wheat prices trend lower, there remained concerns the market could turn higher once again. The fate of the 2008 U.S. corn crop holds a key to wheat price direction in the next few months, the wheat market analysts agreed, and increased dryness across the northern Plains, the Canadian Prairie provinces and in some Australian growing areas was attracting attention.
“The corn crop is still well behind normal in its development, despite recent favorable weather,” Mr. Christopher said. “An early frost could trigger a price rally.”
At the same time, there were doubts about just how high corn prices could go.
“At $7.50 corn, we destroyed a lot of demand,” Mr. Christopher said, pointing to the ongoing cattle herd liquidation and smaller chick hatch and egg sets. “The market found levels at which people wouldn’t or couldn’t buy it.” Even ethanol manufacturers trimmed production schedules when corn prices were at their highest.
Mr. Meyers said there were concerns about declining spring wheat condition ratings in recent weeks. The U.S.D.A. rated the spring wheat crop condition at 63% good to excellent on July 20, compared with 74% at the end of June.
While growing conditions in Australia were vastly improved from a year earlier, the harvest there won’t begin until October/November, and some areas were drying out.
“Some private estimates of the Australian crop were ratcheted down to 18 million to 20 million tonnes compared with the current U.S.D.A. projection at 25 million tonnes,” Mr. Meyers said.
Longer term, wheat faced competition for acres this fall from corn and soybeans, a competition that could be made even sharper if the U.S.D.A. fails to offer early penalty-free releases from Conservation Reserve Program contracts expiring over the next two or three years.
The U.S.D.A. earlier promised a decision this summer on whether it would allow some producers to opt out of their C.R.P. contracts early, potentially returning many C.R.P. acres to production in 2009. Most C.R.P. acres are concentrated in wheat areas, and if a significant number of C.R.P. acres were to be allowed back into production, wheat likely would benefit more than any other crop. Such an early release could offset what many otherwise expected to be a decrease in wheat acres planted for harvest in 2009, said Mr. Meyers.
Decision-making on the matter in the U.S.D.A. was complicated, though, as a result of the National Wildlife Federation (N.W.F.) challenging in court the May decision by the U.S.D.A. to allow haying and grazing on C.R.P. acres after the nesting seasons in the various states. The N.W.F. won a restraining order preventing the haying and grazing because the U.S.D.A. failed to conduct a required environmental impact study. The U.S.D.A. and the N.W.F. were ordered to find a compromise. If they fail, the court could impose a resolution to the current imbroglio.
Mr. Meyers was hopeful an early release of some C.R.P. acreage still might take place before winter wheat planting this fall, but Mr. Christopher was concerned the N.W.F. lawsuit may be just the first round in a tussle between environmentalists seeking to preserve the C.R.P. as it is and producers seeking early release of the least environmentally sensitive acres enrolled in the program.
As wheat futures prices plunged, cash wheat premiums also tumbled – from all-time highs in the case of hard red winter and hard red spring wheat – to near average harvest-time levels. The weakening in the cash market was made possible by successful rationing of the remaining supplies during the last several weeks of the 2007-08 crop year and the expansion of the winter wheat harvest.
Farmer wheat selling slowed as the winter wheat harvest began winding down.
“Farmers have been slow to sell wheat after the flat price break,” said Bart Brummer, senior wheat merchandiser at The Scoular Co., Indianola, Iowa. “Producers are comfortable to wait out the market in hope of seeing prices move higher to levels of a few months ago.”
Mr. Brummer said the “pre-sold book” this year was normal in most areas and perhaps 25% higher than normal where wheat is considered to be more of a cash crop.
“The majority of the pre-sold bushels were contracted early in the flat price move,” he said. “Because prices advanced so quickly, additional selling into the market was pretty low. I would say 15% to 20% of the harvest wheat was pre-sold. Today the producer owns about 75% of the crop.”
Wide carrying charges in wheat futures tell farmers it’s okay to wait before selling much more wheat, Mr. Brummer added.
“As we enter the fall feed grain period, the basis will pull some of the carry out of the market,” he noted. “Business managers will maximize their space returns and minimize their cash usage by selling wheat and storing corn.”
Wet weather across key winter wheat areas during the winter and spring maximized yields but also created the conditions for crop disease, especially scab. Vomitoxin was found in parts of Missouri and southern Indiana and in parts of eastern Kansas and southeastern and south central Nebraska. Mr. Brummer said problems were localized.
“Test weight and vomitoxin have commanded a lion’s share of news,” he said. “With the addition of new delivery points in Kansas, one would expect off-grade stocks in those facilities to increase, while the market as a whole will focus much more on the sub-11%-protein supply as the challenge in this year’s crop.”
Low-protein wheat was predominant in the Texas and Oklahoma harvests, but protein in Kansas was expected to exceed 12%. Pockets of high-protein wheat were commonplace in western Kansas and western Nebraska.
U.S. Wheat Associates on the basis of 137 of 360 intended samples indicated hard red winter wheat average protein this season was running at 12.4% compared with 11.5% in 2007. Average test weight in the samples analyzed to date was 59.9 lbs per bu compared with 59.7 lbs last year.
Corn, soybean crop prospects improve with weather
Since “bottoming out” in mid-June, corn and soybean crop conditions have improved steadily, while corn prices have tumbled more than 25% since setting record highs in late June.
March through July 2009 corn futures prices were over $8 a bu ahead of the June 30 U.S. Department of Agriculture Acreage report. Soybean futures moved above $16 a bu following the report.
Since then spot through June 2009 corn futures prices in Chicago have plummeted more than 25%; the December 2008 contract on July 22 closed below $6 a bu for the first time since April 1. Most soybean futures contracts have dropped more than $2 a bu, or as much as 15%, since the first week of July with nearby months under $14 a bu for the first time since the first week of June.
Outside influences, such as retreating crude oil prices and commodity fund selling, have been cited as helping drive prices lower, while improved weather has been the major fundamental influence pressuring prices.
Corn prices shot higher in June as flood waters inundated Midwest fields, especially eastern Iowa, southeast Wisconsin and parts of Illinois and Missouri. U.S.D.A. crop condition ratings for the 18 major producing states bottomed at 57% good to excellent as of June 15, compared with 70% around the same date a year earlier. But since then corn crop conditions have improved, with the good to excellent rating at 65% as of July 20, even moving ahead of last year’s rating of 62% at the same time.
The corn crop remains about two weeks behind “normal” because of a prolonged cool, wet spring, late planting and replanting. That has raised industry concerns about heat stress during the key pollination period and about a potential early frost on late maturing crops.
But David Salmon, meteorologist and owner of Weather Derivatives, a Kansas City-based agricultural and energy consulting service, expects the Midwest corn crop will face neither extreme summer heat nor an early frost.
“Precipitation has become spotty but temperatures will remain reasonable with a day or two hot, but then it will cool back down,” Mr. Salmon said. He expects no prolonged heat spell that would harm crops in the Midwest. “Weather is not all that great, but the crop will be carried through with plenty of soil moisture.”
Mr. Salmon forecast corn yields will average near last year’s 151.1 bus an acre based on current ratings and his expectation of weather conditions through the growing season.
Corn pollination in the Midwest, which usually peaks in the last two weeks of July, is widely variable this year and likely will peak the first week of August, when it typically is hotter and drier. But because of adequate soil moisture and “reasonable” summer temperatures, Mr. Salmon does not foresee a problem with the late pollination.
Good soil moisture also should help to alleviate early frost concerns.
“Dryness tends to predispose an early frost,” he said. While better moisture conditions don’t necessarily predispose a late frost, he said, they tend to remove the predisposition for an early frost.
Soybeans in the Midwest are following a similar path as corn with peak blooming and pod setting periods delayed about two weeks from average. Mr. Salmon expects soybean bloom in the Midwest to peak the first week of August.
Good to excellent ratings for soybeans in the 18 major states sank to 56% as of June 15 and have edged upward to 61% as of July 20, equal to the year-ago rating at the same time, the U.S.D.A. said.
Yield prospects also have improved during that time. Mr. Salmon forecast soybean yields to average 42.7 bus an acre based on July 20 conditions, with that number likely to hold until harvest. The U.S.D.A. said soybeans averaged 41.2 bus an acre nationally in 2007.
Mr. Salmon noted that conditions in the Southeast have become extremely dry and yields there likely were suffering, although not as severely as last year.
He also said dryness in the northern plains “was not great for row crops” but that spring wheat could benefit with higher protein levels.
Trendline projections in the U.S.D.A. July 11 supply/demand report put 2008 U.S. corn production at 11,715 million bus with an average yield of 148.4 bus an acre and soybean production at 3,000 million bus with an average yield of 41.6 bus.
The first survey-based soybean and corn crop production and yield forecasts of the 2008 season will be released by the U.S.D.A. on Aug. 12.
Mexico and the western US.
The facility has space for approximately two million bushels of grain, which Scoular will use to handle primarily wheat, milo and corn. Scoular’s Coolidge facility is operated under the leadership of general manager Jim Foltz and assistant manager Larry Fallwell.
Scoular is a century-old agribusiness company supplying grain and feed ingredients throughout North America.