Demand for top-quality wheat during grain glut

There's good news for quality wheat growers, but not so good news for most other commodities

pile of grain in an open field

Prairie farmers who harvested high-quality wheat this year will be among the lucky few able to cash in on a world market sagging under record production, lower quality and a drop in demand from key importers.

“The world has not produced a particularly good crop in terms of quality, so there are some quality premiums in the market,” CWB analyst Bruce Burnett told the final Manitoba Agriculture, Food and Rural Development Crop Talk webinar Oct. 1.

“High-quality, high-protein wheat is looking at prices that are significantly higher than what the futures values are,” he said.

For example, he said No. 1 red spring wheat with 15 per cent protein is fetching around $11 per bushel on the cash market in Minneapolis, whereas the Minneapolis contract is drifting below $6 per bushel.

And while the prospects of achieving high quality on any remaining unharvested wheat are dropping by the day, Burnett estimated more than half of Canada’s CWRS crop was harvested before the latest bout of wet weather hit and will grade No. 1 or 2. Protein levels are generally higher than they were last year, he noted. Much of that wheat is in Alberta, however, where farmers are about 80 per cent finished with their harvest.

Running behind

Harvest across the rest of the Prairies is running behind. Farmers need a week to two weeks of good harvesting weather to get the job done, which current forecasts suggest won’t occur until mid- to late October, he said.

Burnett said the outlook for most crops farmers have produced this year, however, is less optimistic.

Canada’s crop is smaller that last year’s record levels, according to Statistics Canada data released Oct. 3. StatsCan pegged all-wheat production at 27.48 million tonnes and canola production at 14.08 million tonnes.

But the crops would still be the third-largest wheat harvest in 18 years and third-biggest canola crop ever and they are feeding into a world market that is already well supplied.

“We do have a supply-side glut coming here,” Burnett said. “We are now at the point where global stocks are built back up and are expected at the end of the year to be at record levels.”

Although demand is relatively strong, two key importers — China and Brazil — are expected to cut back their purchases of wheat and corn this year. “Without demand for corn from China, we are not going to make a dent in these stocks.

“We think the December corn will probably dip below $3 maybe for a session or two, but in likelihood we’re going to remain in this $3.20 environment for most of the U.S. harvest season,” he said.

Pretty normal

Farmers will no doubt find that disappointing, but Burnett noted it’s actually pretty normal. “I’ve been in this business for more than 20 years, and those are levels I am more familiar with,” he said. “The low $3 on the corn side historically is a pretty good price.”

On top of record production, the world economy has been slow to recover from the financial crisis. The strengthening U.S. dollar has the effect of lowering commodity prices — because most commodities are traded in U.S. currency.

And while China’s economic growth at between seven to eight per cent seems strong in the North American context, “for them, it’s a real slowdown,” he said.

The global corn carry-over is estimated at just under 190 million tonnes, which is 51 million tonnes higher than two years ago.

“Unless we start to see supplies contract, (prices are) not really going to go upwards too much.”

The same goes for most grades of wheat. However, Canadian wheats are priced competitively.

“Price-wise Canada is very competitive. We’re pricing ourselves under the U.S. market in terms of the higher-quality wheat so we should see a fair amount of demand.”

Burnett is predicting a major acreage rotation away from corn in 2015 into soybeans, which will put downward pressure on the oilseed complex.

Global soybean production is already increasing. Brazilian and Argentinian producers have begun planting soybeans after giving up on corn. The USDA recorded a Brazilian soybean production at a record 94 million tonnes in September. That’s up eight per cent from last year.

“Prices right now aren’t doing the job to restrict that movement,” he said.

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