Like most farmers, I was watching for the May USDA Report, hoping that U.S. government analysts would reveal something new that would kick start the wheat market. They came up empty-handed. The fact that there is no news seems like an odd thing to write about in a newspaper, but since everyone who grows wheat ultimately needs to market his crop, taking stock of the situation and revising a sales strategy is entirely in order.
In their most recent estimates, the USDA put world wide wheat ending stocks at 255-million metric tonnes, which is 34.1 % of global annual demand. For North America, the situation is remarkably high. With estimated ending stocks of 31.54 million metric tonnes, (the highest since 1987-1988), we will carry about
50 % of 2016’s wheat production forward into the 2017 crop supply. There’s nothing in either of these estimates that would lead a buyer to believe we’re in any risk of running out, and therefore no reason to expect prices to rally higher.
There’s a huge ethical issue in a society where children are starving to death in Yemen and South Sudan, while a third of the word’s wheat supply sits unused past its first birthday. There’s no question that global agriculture is completely capable of producing adequate inventories of wheat. There’s also no question that humanity has yet to figure out how to compassionately share. Since we have no reason to believe that our species is going to smarten up prior to Ontario farmers needing to market their 2017 crop production, burdensome inventory is going to remain a price issue.
If a farmer is sitting on old crop (2016) wheat in a bin right now, the best sale that he can make is to market it as 2017 crop and ship it in the spring of 2018. For most of the past crop year, soft red wheat spot values have been around $200/tonne. For March / April 2018, the contract prices are in the $230s/tonne. It’s a 15 % return on investment to hold the wheat for another 10 months. If you can borrow operating capital for 5 % and earn 15 % by storing wheat, it’s a really rational plan (if you can manage bugs). The key step in this plan is that you absolutely have to forward contract the deferred delivery period, or the whole plan is a bust.
Perhaps it’s due to the amount of Ontario’s 2016 crop wheat that got fed, or perhaps it’s simply the slow pace of farmer selling, but relative to other soft wheat production areas south of the border, Ontario’s new crop wheat bids are curiously high. For most of this past winter and spring, Ontario elevators have been posting basis bids which, when converted to U.S. pricing, are $0.10 to $0.15 per bushel higher than are shown in Michigan or Ohio. Ultimately, American flour mills are a major market for Ontario wheat, and U.S. ports compete with us on export sales, so maintaining a price premium to our American competitors is a limited time offer. The Canadian market can support a premium price as long as volumes stay thin, but if a deluge of wheat suddenly comes to market during or shortly after harvest, those premiums can’t be sustained. If your marketing plan consists of moving wheat at harvest, then get it booked before the supply chain comes under any seasonal pressure.
Imagine trying to skip a rope with a bowling ball in your back-pack. There’s simply too much weight to build or maintain any amount of enthusiasm, and it takes less effort to go down than it does to bounce higher. That bowling ball is essentially what these massive inventories are to wheat prices. They simply don’t jump any higher than they have to in order to fulfill the end users’ immediate needs.
With the 2017 wheat crop in the Great Lakes basin so far developed now that it’s unlikely we can damage supply, the next force to potentially put the wheat market in motion is a fall price rally in order to encourage producers to plant 2018 acres. Any upswings prior to that are more apt to be sympathy rallies keeping pace with other feed grains.
In the current over-supply situation, the key to profitability in winter wheat production is in aggressive forward marketing in order to capture the higher future’s prices in the further away delivery windows. If you like to sit on grain until you like the price, or roll basis contracts until you see a rally, you’re not going to enjoy the 2017- 2018 wheat market.
The most profitable wheat sale that can be made right now is to sell 2018 crop wheat before the 2017 crop is harvested. There’s money to be made, but it won’t come from being patient.
