The price of every class of wheat pushed strongly higher in 2010 as production problems beset nearly all the world’s major wheat growers to offer a uniformly supportive backdrop for the global wheat market.
But with wheat prices now at multi-year highs around the world, end-users are starting to seek out substitutes for expensive feed wheat wherever they can – setting the stage for a price dislocation between low or feed grade wheat and higher-quality food wheat in the months ahead.
Through much of the past year, the prices of each class of wheat traded on U.S. exchanges – in Chicago, Kansas and Minneapolis – kept in close proximity to one another and followed the same rising path as broadly supportive global production hiccups steered overseas buying interest toward U.S. shores.
In recent weeks, however, there has been a noticeable widening in the spread between the price of the high-quality wheat traded on the Minneapolis exchange and the price of low-quality wheat traded in Chicago. Indeed, the Minneapolis/Chicago spread widened from less than five cents a bushel in early August to more than $1 a bushel by mid-December as demand for feed-grade wheat failed to keep pace with the buying interest seen in the higher-quality arenas.
A further widening in the high/low-grade wheat spread can be expected in the weeks ahead should global wheat values remain strong enough to force further end-user rationing. Also, as we approach the U.S. planting season, spring wheat futures in Minneapolis are expected to find additional support as that crop competes for acres in Minnesota, the Dakotas and across the Western Plains.
SOUTHERN HEMISPHERE PROBLEMS
Australia’s heavy rains and recent flooding have damaged that nation’s crop and led to a broad lowering in the overall quality of wheat produced in the region. This increase in feed-quality wheat represents direct competition to Chicago wheat futures, even as the reduction in Australian high-grade wheat will likely prove to be a boon for holders of Minneapolis and Kansas City wheat.
A similar story is unfolding in Argentina, where historic dryness has robbed the emerging crop of critical moisture and relegated vast swathes of the country’s crop to feed-quality status.
Somewhat offsetting what threatens to be an excess of feed-grade wheat has been a patchy growing season for U.S. winter (feed grade) wheat, which was impacted initially by overly dry planting conditions and has been recently threatened by a shortage of snow cover as the crop heads into winter dormancy.
Even so, overall U.S. wheat-planted acreage is projected to be up by more than five million acres over year-ago levels, and it is far too early to tell how much of the crop has been impacted by the adverse conditions thus far in the growing season.
All told, while the continuing production problems plaguing the world’s wheat growers look set to sustain the upward trajectory of global wheat prices in the months ahead, it looks increasingly likely that a further widening in the spread between low-and high-quality classes will emerge as end-users attempt to find substitutes for their feed needs amid a general shortage of high-quality food grains that does not look likely to be resolved for the foreseeable future.