The winter wheat crop is certainly one of the good news stories for Ontario agriculture in 2020. Great seeding conditions last fall enabled a large acreage to be planted, and excellent spring and summer weather have created enormous yield potential for this year’s crop.
Ontario’s domestic flour mills grind roughly 500,000 metric tonnes of locally-grown soft winter wheat each year. That volume represents about a quarter of Ontario’s annual production. Finding demand for the other 1.5 million tonnes is key in order to keep prices up. If farmers are looking for a factor which could encourage buyers to bid enthusiastically for winter wheat, we should analyse the other potential sources of demand.
One of the key export markets for Ontario winter wheat is the flour mills in the nearby U.S. states of Ohio and Michigan. While those are still going to be important destinations for our wheat, their own local acreage is expected to be much larger in 2020. Although Michigan’s 2020 winter wheat acreage is not substantially different than in 2019, the USDA recently predicted a significant yield increase in Michigan would result in their 2020 winter production coming in at 37.26 million bushels. That’s roughly 10 % bigger than 2019’s 34.08 million bushels.
In Ohio, the USDA estimated the 2020 winter wheat production at 35 million bushels, a full 62 % bigger than Ohio’s 2019 crop. The grim reality is that with larger local supplies, the less enthusiastic American millers will be able to bid aggressively for Ontario wheat. It’s important to note that Ontario produces more winter wheat annually than Michigan and Ohio combined, so it’s impossible for U.S. millers to ignore the Ontario market, but bigger crop everywhere makes the buyers’ job easier.
Nearly a third of Ontario’s winter wheat crop is used in livestock feed. Another 10 % of Ontario’s wheat goes to Quebec where feed is the dominant market for soft wheat. In total, nearly as much of our wheat crop gets used for livestock feed as gets used in flour milling. That’s why every summer the cash price of corn and soft red wheat (in dollars per tonne) reach the same level as the surplus supply of wheat buys space in rations and moves into the feed market. How soon those two prices slip into line and how long they stay in lockstep depends on how much surplus wheat needs to move and how tight the supply of corn is.
Back in the winter, it appeared that Ontario’s corn inventory might get tight in the late summer and fall due to lower yields in the 2019 crop for some parts of the province. But with the COVID-19 shutdowns reducing demand for gasoline and slowing ethanol production, Ontario’s remaining corn inventory is much more closely matched to the remaining demand.
The great news is that many Ontario wheat producers have already put together a really good book of forward sales, so the portion of the crop which still needs to be marketed is relatively small. Last fall, as this year’s winter wheat was being sown, the total forward contracts of 2020 crop was close to 60 % of a typical year’s production. That’s really helpful for the price because it means that producers will generate a great deal of cash flow and storage capacity without burdening the marketplace with more sales.
New crop wheat bids at Ontario elevators have remained high through April, May, and June at least in part because there has not been a great enough volume of producers selling to force prices down. That’s created an opportunity for wheat producers who plan to sell more wheat through the harvest window. We already know that as the supply glut forms in the wheat pipeline, (likely in August), that soft red prices will move into line with corn values. A good marketing plan is going to avoid pricing anything during that heavily discounted period.
For farmers who store wheat, an August to September slump in soft red wheat values has far less severe consequences. An over-supply of crop trying to go to market in the late summer will certainly develop but downward pressure on the front month prices (July and September futures) will not be as great in the forward months like March and May of 2021, so we should actually expect to see the return for storage improve as we proceed through the harvest lows.
One way to think about this summer’s wheat market is like leaving a crowded arena at the end of a game. In order to miss being stuck in the crowd, or lined up in the parking lot waiting to get to the exit, it might be a good idea to leave the wheat market a few minutes early. Otherwise the only way to avoid the congestion will be to hang around and kill some time while the crowds clear.
Steve Kell operates a crop farm in Simcoe County and is a former grain merchant for Parrish and Heimbecker Ltd.
