By Steve Kell
All too often as we analyze commodity markets, there tends to be a preoccupation to look just at the big “bottom line” numbers such as total supply and total demand. We tend not to unpack those categories into the detailed elements which actually make up the figures we see in the news headlines. This is especially true in the late stages of 2016 when one starts to break down the wheat market to the sub-groups from which supply and demand are comprised.
There is absolutely no debating that the world’s total wheat stocks are extremely large right now. Nearly one-third of all North America wheat following the 2016 harvest will have a birthday before it finally gets moved out and used for flour, feed or seed. But in some specific classes of wheat, high-quality supply is actually fairly tight and much of the inventory in long-term storage is there because it is of low quality. The producers are waiting for a miracle where the quality threshold bar shifts so they will be able to sell that wheat as something other than feed.
While the U.S. high plains and the Canadian prairies had great moisture during the 2016 growing season — leading to higher than normal yields and total wheat production — those rains didn’t stop when harvest started seeing lower falling numbers, higher vomitoxin levels, and lower protein levels. While there’s record wheat production in this part of North America, high quality milling wheat and durum are actually in tight supply. An unusually large portion of the wheat stocks are backing up in the country because they’re not in the quality bracket that would allow it to flow to the traditional markets.
In the Great Lakes basin, we also have an enormous supply of wheat, but unlike big parts of this continent, our quality is actually quite good this year. Ontario’s current wheat inventory is approximately 1.5 million tonnes. Our “domestic” flour milling demand for Ontario wheat is about 80,000 tonnes per month (640,000 tonnes before the next harvest), and based on fall 2016 plantings, there’s about two-million tonnes of new crop wheat coming next summer. Unlike the hard wheat and durum producing regions, there’s no rational basis to believe that eastern soft wheats are going to become scarce, but the spillover effect to western anxiety still has the potential to create marketing opportunities in this market.
First of all, the speculator funds are running significant short positions in all three wheat futures exchanges (Chicago, Kansas City and Minneapolis). Funds put on those short futures positions are based on production numbers, but with extremely little wheat actually being marketed right now and spreads collapsing, it seems logical that the speculation funds are likely to close their positions.
The faster the shorts try to get out, the greater the chance that we will see a futures rally for eastern wheat fueled in part by quality issues in other places. Closing up a fund short does not create a long-term sustained rally, but it is likely to create an opportunity for disciplined marketers to use the price movement in order to catch up on some sales.
The other unique thing about the current wheat market is that with buyers fixed on the gross volume of world wheat stocks and sellers unimpressed with price, and nervous about quality issues when they go to ship, is that we have a marketplace right now which is trading extremely little volume. It’s entirely possible that the price is going to need to mount at least the start of a rally in order to get product flowing again. In spite of the size of the current wheat stocks, we are apt to see a pop in prices simply to initiate the start movement.
In spite of the gross volumes of wheat currently in the world, there are a few good reasons to anticipate a rally. The trick for producers is to establish reasonable targets for price which are achievable, and to sell the forward time periods in order to capture the futures carry as part of the means to reach those higher prices.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.
