Wheat Market Deep Dive
The wheat market has shifted versus a few months ago. Harvest is complete for the U.S. and is over half complete for Canada. The Northern Hemisphere is planting winter wheat, with Argentina and Australia to start harvest soon. We have lost some tonnage in Argentina, but Australia’s production is expected to rebound significantly versus last year along with its export program. From a supply side, we lean neutral to bearish. But when we bring in demand, we lean neutral overall for wheat.
What has changed versus earlier this year
Crops have grown for several exporters and for India and China. The EU crop is still down sharply year over year, but production totals have been bumped higher and Russia is thought to have a larger crop.
On the flip side, feed demand is strong, which is helping keep some support in the wheat market. Plus, food demand has not eased despite some in the market thinking it could with COVID-19 restrictions likely detering restaurant use.
Chicago remains at a premium, not likely to change
The wheat markets have been inverted for long enough that it seems like the norm. Chicago has been trading at a premium off and on versus Minneapolis for about a year.
That pattern is not expected to shift in the near term, and we do not look for Minneapolis to gain substantially on Chicago in the coming months with North American high protein supplies being ample.
While those supplies have declined for U.S. HRW, the high-protein spring wheat supplies have not decreased. Plus, with the EU having a substantial loss in production year over year, and with U.S. SRW supplies tight, Chicago is likely to remain at a premium to both of the hard wheat markets.
There is additional risk that Kansas City gains on Minneapolis futures in the near term, especially given the latest update to USDA’s U.S. balance sheet outlook. U.S. HRW supplies were further tightened in the latest USDA update while spring wheat supplies are ample. This is expected to be supportive to Kansas City relative to Minneapolis.
What about local markets?
Harvest season is wrapping up with Manitoba’s harvest essentially complete, Alberta about half complete and Saskatchewan 88% complete. But basis remains supported despite harvest pressure, which is primarily tied to the export market.
Canada had a strong finish to its 2019/20 exports and is off to a strong start to 2020/21 exports with buyers likely still trying to build supply cushions. While we are seeing strength in the basis market, futures are struggling to move higher.
With ample supplies of spring wheat between the U.S. and Canada combined, it is hard to justify substantially higher futures prices. Canada’s non-durum spring wheat stocks are forecast to increase by about 500,000 tonnes year over year — and that is assuming a record export program — while U.S. stocks are projected to increase by about 800,000 tonnes.
Combined, the stocks outlook is forecast to be at its largest volume since at least 1996/97, topping the 2013/14 carryout that reached 12.4 million tonnes.
FBN's take on what this means for the farmer
Demand is keeping this market supported as the North American supply situation is abundant. China will have to remain a key taker of Canadian and U.S. wheat to keep basis levels trending above recent years.
But even assuming a record export program for Canada, we are still situated to have a boost in ending stocks, which is expected to keep pressure on the futures market. The good news is that we may not be buying in acres. Prices could be much more attractive this time next year.
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