by Bob Bailey, DTN Basis and Feedstuffs Analyst
In looking over the cash market indexes for the past week, I found that hard red winter wheat showed the most positive improvement for the week compared to the other grains. The cash index was up 19 cents and the basis increased 6 cents, which balanced with the 25 cent gain in futures. I found it interesting because, on the face of it, HRW wheat does not appear to have much going for it. Obviously, that is not the case. A closer inspection into this market will no doubt tell us what is behind this market that is pushing it higher.
The first thing I like to look at is the supply and demand tables as they give a starting point as to what market analysts believe will occur during the crop year. I am using the latest USDA supply and demand report from early October, and in that report it shows total supply of 1.167 billion bushels for HRW wheat and total usage of 869 million bushels, which leaves a carryout of 298 million bushels. Total usage is pretty evenly divided between domestic and export use. Domestic use is estimated at 439 mb and exports at 430 mb. Exports were lowered 10 mb in this report in line with a decline in overall wheat exports of 50 mb. HRW wheat production was reduced in the Sept. 30 small grains summary report to 780 mb from 794 mb in the August report. In the end the carryout stocks were raised 26 mb from the September report. This just verifies that even though production was reduced this year there is not enough demand to reduce carryout, hence prices should be on the defensive.
World stocks are also sizeable as was indicated in the October supply and demand report that raised ending stocks 7.8 million metric tons to 202.4 mmt. U.S. production was lower this year, which means other parts of the world are growing more wheat. This is one of the reasons U.S. exports have been lowered. The U.S. has not been able to be competitive with exporters in other parts of the world.
The big issue for HRW wheat this crop year has been production. Extremely dry conditions across the HRW wheat belt coming out of winter and through the growing season weighed on yields, especially in the Southern Plains. Many fields in that part of the belt were abandoned and yields were well under projections. The one bright spot this year was higher-than-normal protein levels. The stress on the crop created proteins that tested upward of 15{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} to 16{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} in the Southern Plains and 13{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} to 14{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} in the balance of the HRW belt. High protein for HRW wheat is usually considered to top out at 14{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} so the higher proteins from the Southern Plains were an exception. The only problem was that there wasn’t much of it.
At harvest time, producers delivered on contracts and held the balance of their crop in storage. Cash prices at harvest were about where they are now and with the drought continuing in the central and Southern Plains, selling the crop, for most producers, was not an option. In late August, cash prices for HRW wheat broke the $8-per-bushel barrier and farmers moved a portion of their crop. It did not take long before prices backed up. Basis levels at that point were around 75 cents under the Kansas City December futures. Since that time, basis levels have been moving higher while futures are trending lower. Current basis levels are around 45 cents under the Kansas City December futures, a gain of 30 cents in two months.
If the basis is improving, there has to be something driving it. It is not exports as they have been reduced due to a lack of demand as a result of competition from other parts of the world. That leaves the domestic market. It is highly unlikely that feeders are using this class of wheat for livestock feed as it is usually earmarked for milling and baking unless the quality of the wheat is poor and that hasn’t been the case. Feeders in the Plains feeding wheat would most likely be using SRW wheat as it is cheaper and carries the protein content of corn. It has been documented that SRW wheat has been moving from eastern points into southwest feedlots. That leaves the mills. I suspect they are the force behind higher basis values. Mill demand has been steady since harvest, but has recently picked up due to tight available supplies of spring wheat. Spring wheat suffered a short crop this year resulting in farmers holding the crop in storage in anticipation of higher prices later in the crop year. Mills are not in position to wait for that to happen and are looking to HRW wheat to substitute its high protein content in place of spring wheat in some of their formulations.
No one knows how long this will last but if and when spring wheat starts moving, there is a good probability that the demand for HRW wheat will fade. Until then, basis levels look to continue an upward track. Looking at the HRW wheat basis chart shows the basis is closing in on five-year maximum basis levels. It would not be surprising to see the HRW wheat basis push through those highs as long as the futures market doesn’t break out of its current trading range to the upside.
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Posted with DTN Permission by Haylie Shipp
