In the fall of 2019, Ontario farmers planted one of the biggest winter wheat crops in our history. With unseeded acres resulting from the wet spring, and new crop wheat bids more attractive than the returns shown by other crops, Ontario farmers planted 1.003 million acres of winter wheat to be harvested this year.
What’s curious about the fall of 2020 is that we appear to have planted just as many acres of winter wheat two years in a row. Because of the delayed reporting period for crop insurance, we don’t know precisely how many acres of winter wheat were sown in the fall of 2020 at press time, but with such an early soybean harvest, good field conditions, and attractive new crop wheat values, it appears that Ontario farmers did not miss the chance to plant as much wheat as they had wanted to. So how does the wheat market react when two historic sized wheat crops come down the supply pipeline two years in a row?
The first bit of good news for Ontario farmers is that it’s not all good news everywhere. Unlike Ontario, where most of the winter wheat was planted early and into good field conditions, our American neighbours are experiencing some less-than-ideal weather for their winter wheat crop. In its weekly USDA Crop Progress Report, the American winter wheat crop looked to be in slightly poorer condition than is typical. The USDA currently suggests that 47 % of their 2020 winter wheat is in Good to Excellent condition compared to 52 % Good to Excellent on the same date last year.
Those crop condition ratings represent the entire U.S. wheat crop, (hard and soft, red and white), so by the time that we get to the 2021 harvest, it may have very little impact or cash bids for soft red in the Great Lakes, but for now, those condition ratings do impact futures markets, and lower crop condition ratings do support higher prices.
Expect the market to remain clearly focused on crop conditions at least until we reach the point next spring where ice and flooding no longer pose a risk to the wheat crops winter survival. We should expect to see the “risk-on” premium remain in wheat prices until at least March.
Even more important to wheat values, there is a very clear and well entrenched price ratio between corn and soft red wheat futures. Typically, wheat futures are 1.5 times higher than corn futures. That relationship is not an abstract construct based on trader’s expectations, but rather just a mathematical calculation based on that value of starch. The two grains have the capacity to replace one another in feed formulations depending on their prices, so any time that the wheat-to-corn futures price ratio drifts outside of its normal range, we know that the market will move in order to pull values back into balance. For producers of corn and wheat who have crops to sell, understanding these price ratios can provide an important signal on when to make sales prior to the market making an adjustment.
What has been really curious about the fall of 2020 has been the way that rising corn prices have supported wheat values. Back on September 1, wheat futures were 1.6 times the price of corn futures. With wheat planting about to begin, and the anticipation of a big corn harvest only a few weeks away, it seemed like a pretty clear signal to sell some wheat before harvest pressure pushed prices lower. However, over the two month period of September and October, corn futures prices rose $0.50/bu, (from U.S. $3.51 to $4.01), and wheat futures rose $0.44/bu, (from U.S. $5.64 to $6.08).
The ratio of wheat-to-corn value went right back into balance at 1.5 to 1, but it was fueled entirely by the strength in corn prices dragging wheat futures up. Enhanced export demand for corn and a recovering ethanol market drew corn prices higher, and wheat futures were pulled along in corn’s up-draft.
Wheat is certainly not apt to become scarce in the Great Lakes basin at any point in the 2020 – 2021 marketing window, which means that its relationship to corn is going to be the clearest signal for making marketing decisions. As long as corn prices can stay strong, it will be a safe strategy to hold wheat. If the corn price complex starts to break, sell both.
The fun part about being a wheat producer right now is that any sales made in the fall of 2020 were either at historically “good,” or historically “great” prices. The trick now is to figure out how to make the next increment sales in a way that drags each farmer’s average sale price higher, and the way to accomplish that will be to stay laser-focused on corn.
Steve Kell operates a crop farm in Simcoe County and is a former grain merchant for Parrish and Heimbecker Ltd.