As one travels around Ontario, it’s apparent that soggy fields and the fatal combination of flooding and ice have had a detrimental impact on a significant portion of the winter wheat crop. Much of it was sown into tough field conditions during last fall’s wet weather, and the sub-ideal spring has done little to ease the stresses on an already fragile crop. Unfortunately, in the midst of what is clearly an agronomy issue, there’s also beginning to be a lot of noise about what we might expect from wheat prices from a smaller Ontario crop, and the grim reality is that our provincial problems aren’t a big enough deal to greatly impact a global market.
Typically, Ontario grows about 800,000 acres of winter wheat and, at an average yield of roughly 85 bushels per acre, our total annual production is about 1.84 million metric tonnes. While Ontario wheat producers are extremely fortunate to have several flour mills in the province grinding Ontario wheat, the total demand for locally produced winter wheat in the Ontario flour industry is only about 600,000 tonnes, a third of the crop.
The winter wheat situation in nearby U.S. states like Michigan and Ohio has a much greater capacity to influence our local pricing than any made-in-Ontario issue. Total soft red winter wheat production in the United States dwarfs Ontario’s crop. Fortunately for our growers, the 2019 American soft red winter wheat crop is forecast to come in at 7.35-million metric tonnes, down from 7.79-million tonnes in 2018. Not only is a smaller U.S. supply useful for price because it has a profound impact on continental supply, but also because 25 % to 30 % of Ontario’s winter wheat makes its way into flour mills in nearby U.S. states.
What really limits the capacity of Ontario wheat prices to rocket higher, due to their own supply shortfall, is that the biggest single consumer of Ontario grown winter wheat is the livestock feed market, and that has an extremely elastic demand. Over the past couple of years, more of Ontario’s winter wheat crop has been fed to animals than to people. While the flour milling industry can’t really use less wheat if it gets too expensive, relative to alternative starch sources, the feed industry is marvelously adept at finding alternatives. While there’s some baseline demand for wheat in certain rations that won’t go away, between 2015 and 2018, we saw Ontario’s feed industry flex from between 250,000 tonnes of wheat used in feed to 850,000 tonnes of winter wheat fed. That variability in feed demand represents more wheat than all of the winter wheat ground by this province’s flour mills in a year.
With all indications currently suggesting that winter wheat could be in tighter supply in the year ahead, all that the price needs to do is remain high enough above corn that fewer people want to feed wheat.
Wheat prices fluctuate daily and there is almost certainly going to be a summer rally. But let’s give credit where it’s due. In the last days of June and the early part of July in both 2017 and 2018, we saw wheat prices rocket higher due to a spike in Chicago Mercantile Exchange wheat futures prices. Those rallies were both for real, but neither of them had anything to do with winter-kill or reseeded acres. Both of those rallies were tied to weather problems in the U.S. western corn belt, and if we experience similar crop conditions in that region in the summer of 2019, then we should expect to see a similar impact on local wheat pricing.
The marketing decisions which Ontario wheat growers will need to make this year are going to be the result of issues on a continental scale. Watching the Ontario wheat crop is a bit like watching your own shoes while you’re running a race. Although it might seem important, all that it will make you do is trip.
Since it’s already pretty clear that Ontario will have a smaller winter wheat crop in 2019, we know that our pricing baseline will simply need to keep wheat values with a big enough premium to other coarse feed grains that we feed less of it. The selling opportunities then are going to result from locking in on the highs in the corn market that push wheat prices above corn prices, and then nailing the sale in the rallies born out of the U.S. corn belt.
Steve Kell operates a Simcoe County crop farm and is a grain merchant for Parrish & Heimbecker of Toronto.