Production problems haven’t left markets short yet but that could change if Australian growers continue to suffer from a lack of rainfall, which would set the stage for a wheat rally
Reuters / Stubbornly high prices have served to keep U.S. wheat out of contention on the export market in recent months, but a broad jump in winter wheat acreage coupled with growing overseas demand could change that picture.
It’s no surprise that farmers in top hard red wheat states such as Kansas are upping their acres this year, but growers across the eastern Corn Belt seem to be getting in on the act, too. Thanks to crop production issues overseas, those additional supplies could prove to be a boon and not a hindrance.
It’s easy to see why the pace of U.S. wheat export sales has been sluggish over the past few months. Good quality U.S. wheat has consistently traded at a $25- to $40-tonne premium over similar grade French wheat, and at an even larger premium over Russian and Ukrainian supplies.
Even U.S. soft red wheat has traded at a premium to French wheat, and these price differentials don’t even factor in higher freight costs.
Given that U.S. wheat inventories can hardly be considered tight at more than 18 million tons (more than 50 per cent of total projected U.S. consumption for the coming year), the reason for the high prices is not immediately obvious.
Livestock feeders are seeking an alternative to corn, but both soft and hard red wheat futures have held a premium to corn futures since mid-May — with those premiums recently widening to more than $1.40 per bushel for soft wheat and $1.65 for hard. So price-sensitive feedlot managers are unlikely to be the only wheat buyers out there.
Further, domestic feed demand is unlikely to account for the firm basis levels being seen at U.S. Gulf export terminals, which determine the ultimate price tag on U.S. wheat shipments overseas. U.S. Gulf basis for hard red wheat recently scaled the highest levels on record of close to $1.20 per bushel, even as the overall sales pace of that grade of wheat has been slow.
But other reasons, aside from fundamental demand, may be responsible.
Sit and wait
At the farm level, the short corn and soybean crops currently being retrieved from parched U.S. fields have left room in on-farm storage bins for additional crops that in most years would have been cleared out by now. In addition, there is a less precipitous drop-off in forward wheat values than there is in the corn market, meaning that farmers have a strong incentive to offload corn immediately and sit on their wheat inventory.
Storing wheat is also a popular option at the processor and strategic trader level, with both eyeing production problems in top exporting regions such as the Black Sea. This is expected to cause a sizable disruption to exports and set the stage for an uptick in U.S export interest, even at a premium price.
Wheat processors and long-term traders are aware it could take several more months before any shortage of grain from the Black Sea region translates into firmer U.S. prices, as overall inventories of wheat in top importing areas remains fairly high.
But over time, and especially if Australian growers continue to suffer from a lack of rainfall, a sense of supply shortness is likely to merge among wheat importers which could easily trigger a drive for imports from farther afield, such as the U.S.
Farmers currently wrapping up their 2012 corn and soybean harvests and beginning their 2012-13 winter wheat plantings are unlikely to be as focused on the upside potential for the wheat market as other market trackers.
Certainly, many growers are planting wheat because they always do, and an early harvest and friendly fall weather are encouraging them to seed a few additional acres this year.
But other growers are no doubt making a strategic bet that wheat prices will undergo a stretch of sustained price strength going into 2013.
Only time will tell exactly how many additional winter wheat acres U.S. farmers will sow this year as planting is still under way. But early signs point to a much larger acreage. For end users of the crop, such a climb in output will prove to be a welcome development, even if they don’t currently like the look of U.S. export prices.