The total demand for Ontario grown wheat in this province’s flour mills is roughly 560,000 tonnes.
Assuming that the North American Free Trade Agreement stays intact, we can traditionally move another 400,000 tonnes into the U.S. flour mills in New York, Ohio, and Michigan.
The first million tonnes of supply is consumed in the human consumption market within the Great Lakes basin, but to find demand for the other half of the crop depends on the value spread between domestic corn prices (which is the gate-keeper for local feed demand) and export demand in order to move wheat into other parts of the world.
With Ontario’s 2016 winter wheat crop being one of the largest ever produced in this province, flour milling demand for old crop local wheat has long since been satisfied, and with the Great Lakes — St Lawrence Seaway export channel currently closed for the season, by default, feed becomes the chief source of demand for our winter wheat crop. The chart on this page shows Ontario wheat supply and feed demand for the past five crops. One significant statistic is that in years where we produce more than two-million-tonnes of wheat, feed becomes the biggest single source of demand.
The Ontario wheat market got an incredibly useful boost from fusarium infection in a significant portion of this past year’s corn crop. Vomitoxin, which is a secondary metabolite of the fusarium fungus, significantly limits the usefulness of contaminated grain as a feed ingredient. Whether it was the dry summer, or the widespread use of fungicides by Ontario wheat producers this marketplace was fortunate to have a “clean” supply of an alternative feed grain, such as wheat, when the vomitoxin issue is restricting the use of corn in some livestock rations. If you want to take the “glass is half full” view of the situation; it is fortunate to have some increased feed demand for Ontario wheat in a year when there’s nearly a million tonne surplus in supply.
The fact that feed demand is the key force behind wheat values this winter, has created a bit of a disconnect in the mechanism which usually constructs price. In a normal market situation, the cash value of wheat is built from the Chicago Board of Trade wheat futures, and the local cash basis. However since the majority of our spot demand for wheat comes from the feed trade, where wheat is being sourced to replace corn, the cash price of wheat has very little to do with the current wheat futures price. Ontario wheat values for February, March and April are almost entirely a function of wheat’s relative value to corn, and are hardly associated with CBOT wheat futures.
Farmers, who are watching for an opportunity to market wheat, need to consider two entirely different sets of criteria depending on when they might want to sell.
The 2017 crop wheat market is still built very squarely on traditional wheat demand such as flour millers and overseas exporters, who position stocks in their supply pipeline well in advance, and use the wheat futures market as a hedging tool in order to mitigate risk.
From July 2017 forward, wheat price construction is still very much connected to the U.S. futures price, and the Canadian dollar exchange rate. If you’re a farmer looking for a chance to contract new crop wheat, the pricing signals to trigger that transaction are still going to come from a rally in the wheat future’s market.
Old crop wheat prices are currently almost entirely governed by the spot cash value for corn. In early January, Ontario farmers saw a $0.30 to $0.40 rally in CBOT wheat futures, which was almost entirely off-set by an equally-sized decline in wheat basis. The reason for this was that corn prices really didn’t change throughout the course of the wheat future’s rally, and the spot ship value for winter wheat was almost entirely driven by its use as a feed grain.
If you’re one of the farmers who still has old crop wheat in the bin to sell, stop watching the wheat futures market, because at a functional level, that’s not the crop that you still have to sell. You’re selling a corn substitute, which means the corn market drives the price of old crop wheat.