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Too Much Rain on a Smaller Soft Red Winter Crop

Following planting in the fall of 2018, much of the U.S. soft red winter (SRW) growing area received excessive moisture throughout the winter and spring, which also caused lengthy harvest delays in many areas. The excessive moisture adversely affected quality by reducing falling number values and increasing DON values in some areas. At an estimated 7.01 million metric tons (MMT), this is a smaller crop than in 2018 because farmers seeded less and average yield per harvested acre was below last year and the five-year average. Processors should find good qualities in the 2019 SRW crop for cookies and crackers and segments of the crop showed good cake qualities.

That is a summary of results from the U.S. Wheat Associates (USW) 2019 SRW Crop Quality Report, now posted online at https://bit.ly/SRWCQ0919. To complete the report, Great Plains Analytical Laboratory in Kansas City, Mo., collected and analyzed 261 samples from 18 reporting areas in the 11 states that account for about 72% of total 2019 SRW production. Funding for the annual survey come from state wheat commission USW members and the USDA Foreign Agricultural Service.

As always, buyers are encouraged to review their quality specifications to ensure that their purchases meet their expectations.

Wheat and Grade Data. The overall average grade of the samples collected for the 2019 SRW harvest survey is U.S. No. 2. The average test weight is 58.1 lb/bu (76.5 kg/hl), equal to the 5-year average and above the 57.9 lb/bu (76.2 kg/hl) average in 2018. The Gulf Port average of 58.5 lb/bu (76.9 kg/hl) is above both last year and the 5-year average. The East Coast test weight average of 56.9 lb/bu (75.0 kg/hl) is above last year but below the 5-year average of 57.4 lb/bu (75.6 kg/hl).

The East Coast Total Defects average of 2.5% is above last year and the 5-year average, indicating that damaged and shrunken and broken kernels are slightly higher than usual in that portion of the crop. The Gulf Port Total Defects is 1.1%, above 2018 but almost half of the 5-year average. Other Gulf Port grade factors, dockage and moisture are close to or higher than 2018 and 5-year average values.

The Composite average wheat protein content of 9.5% (12% moisture basis) is lower than 2018’s 9.9% and the 5-year average of 9.7%. Both the Gulf Port protein average of 9.4% and East Coast average of 9.7% are below the respective 2018 and 5-year averages. The Composite average falling number of 288 seconds is significantly lower than 2018 and the 5-year average. The Gulf Port average of 289 seconds and the East Coast average of 283 seconds are both significantly below 2018 and the 5-year averages. Approximately 21% of samples had a falling number below 250 seconds in 2019, with 13% below 225. The Composite DON average of 1.3 ppm is above the 2018 average and close to the 5-year average of 1.2 ppm. The East Coast value of 0.5 ppm is below the 5-year average while the Gulf Port value of 1.5 ppm is above the 5-year average. Of the samples tested for DON, 33% of the Gulf Port results and 84% of the East Coast results were less than 1.0 ppm.

Flour and Baking Data. The Composite, East Coast and Gulf Port Buhler laboratory mill flour extraction averages are below 2018 and the 5-year averages. The farinograph peak and absorption values are similar to 5-year averages, but the stability values are all below the 5-year averages. The SRC values generally indicate good quality for cookies. The Composite, East Coast and Gulf Port alveograph L averages of 81 are lower than last year and the 5-year average, indicating lower extensibility. All other alveograph averages are similar to the respective 5-year averages given the variability of alveograph analysis. The Gulf amylograph average of 392 BU and East average of 462 indicate relatively high levels of amylase activity in the crop and are consistent with the low falling numbers.

The Composite, East Coast and Gulf Port cookie spread ratios are all higher than last year and the 5-year averages, indicating good extensibility. Average loaf volumes are all lower than last year and the 5-year averages.

USW will share complete data for all classes of U.S. wheat in future Wheat Letter posts and with hundreds of overseas customers at several upcoming events, including USW’s annual Crop Quality Seminars, and in its annual Crop Quality Report.

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Drought-Fueled Production Losses in Australia Alter Global Wheat Trade

By Claire Hutchins, USW Market Analyst

Prolonged drought has severely impacted Australia’s wheat production and, as a result, contributed to a significant shift in world wheat trade. If current weather conditions in Australia persist, U.S. Wheat Associates (USW) believes these export trends could continue through marketing year (MY) 2019/20 and beyond.

According to USDA data, in the five years leading up to drought conditions that started in 2017, Australia exported an average of 18.5 million metric tons (MMT) of wheat per year. In MY 2016/17, Australian wheat production reached a record 31.8 MMT and exports reached 22.6 MMT, their highest level since MY 2011/12 (a significant portion of this volume was wheat exported for animal feed). In MY 2017/18, however, reduced supplies led to a sharp fall in Australian wheat exports to 13.8 MMT. In MY 2018/19, exports fell again to 9.0 MMT after Australian wheat production declined to 17.3 MMT.

Australia produces white wheats that compete effectively in regional bread applications, but most significantly in South and North Asian noodle markets. Even though there is no single U.S. wheat class with optimal characteristics for fine Asian noodle products, over many years, USW has provided technical assistance to millers and noodle manufacturers on blending of U.S. wheat or flour to optimize noodle quality and compete with Australian noodle varieties. In addition, U.S. hard red spring (HRS) provides a competitive option for higher protein flour needed in many markets to meet expanding demand for loaf bread products and hamburger buns.

USW believes that key customers have turned to the United States as Australian farmers struggle to produce enough exportable supplies. Between MY 2016/17 and MY 2018/19, for example, Australia lost market share in six of its top ten wheat export markets. Notably, Australian wheat exports to the Philippines, Indonesia, Vietnam and Malaysia declined while U.S. wheat exports to those countries increased in MY 2018/19.

Australian wheat’s share as a percent of total wheat imports in four key export markets has declined over the past two market years. Prolonged drought has significantly reduced exportable Australian supplies.

In MY 2019/20, USDA predicts Australian wheat production will rebound slightly to 21.0 MMT and exports are expected to increase to 12.5 MMT. Current USDA commercial sales data also show U.S. wheat exports to those four countries are ahead of last year’s pace.

U.S. farmers understand all too well the financial strain drought creates for their families and for end users of their wheat. Australian farmers must be concerned about whether their market share will rebound when the drought ends and supplies increase. That too is something U.S. wheat farmers, who have lost virtually all their market share in China under the current trade dispute, can understand. Market conditions change for all competitors. Ideally, that competition will continue to be carried out with the best interest of our shared customers and prospects in mind.

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Unfavorable Weather Delays U.S. Spring Wheat Harvest

By Claire Hutchins, USW Market Analyst

Though early April is the ideal planting window for U. S. hard red spring (HRS) wheat, saturated fields and cold soil temperatures kept many farmers out of their fields until late May or early June this year. The same precipitation and cool temperatures that delayed planting boosted early HRS development through mid-June and helped reduce concerns about late planting from central Montana to western Minnesota. Now, scattered precipitation and high humidity across the Northern Plains are preventing many farmers from entering their fields to begin the spring wheat harvest. According to USDA’s August 19 Crop Progress report, only 16% of the country’s spring wheat harvest was complete compared to last year’s 56% and the 5-year average of 49%. In spite of the delay, USDA rates 70% of U.S. spring wheat in good to excellent condition and an average yield of 49.2 bu/acre (3.30 MT/hectare), up from last year’s 48.3 bu/acre (3.25 MT/hectare). USDA predicts the country will produce 597 million bushels (16.2 million metric tons (MMT)) of HRS in 2019.

USW gathered some additional information from our stakeholders in HRS production states.

Minnesota. “It’s been a good year for wheat. The crop looks great and we expect above average yields and average protein levels despite delays,” says Charlie Vogel, Executive Director of the Minnesota Wheat Research & Promotion Council. Farmers in Minnesota, the second largest HRS-producing state in the country, are expected to harvest 91.7 million bushels (2.5 MMT) of wheat in 2019, down slightly from 2018 levels as reduced planted area offset increased expected yields. According to Vogel, Minnesota farmers have barely begun the spring wheat harvest due to scattered precipitation throughout the state. In an average year, farmers would be about 88% complete by now compared to the 14% reported by USDA. In the west, farmers are swathing their wheat in windrows to dry it out before combining. With a cool, dry weather forecast for the next 10 days, Vogel expects Minnesota’s harvest to progress nearly to completion by next week if dry conditions hold.

In Montana, the third largest HRS-producing state in the country, cold and wet soil conditions widened the spring planting window from mid-April to early June. A dry July helped farmers who were able to get their HRS in the ground early, but could hurt yields for late-planted HRS. The Montana spring wheat harvest has been “slow and frustrating” according to Cassidy Marn, Marketing Program Manager at the Montana Wheat & Barley Committee, as rainy, cold weather poured over the southern two thirds of the state around August 10. Marn believes these conditions have delayed the HRS harvest by about 3 days on average and by as much as two to three weeks in some places. Montana’s spring wheat harvest, at 20% complete, is far behind last year’s pace of 42% and the five-year average of 44%. When Montana’s farmers do complete harvest, they are expected to see an average 34.0 bu/acre (2.28 MT/hectare) in 2019, 2.0 bu/acre higher than last year’s yield, according to USDA. Montana’s HRS crop is expected to total 85.0 million bushels (2.31 MMT) this year, down 11% from last year as reduced planted area more than offsets increased expected yields.

North Dakota. “Spring wheat harvest had a sluggish start, but is beginning to accelerate. It is an above-average crop and we are waiting to see how rains impact harvest pace,” says Jim Peterson, Policy and Marketing Director at the North Dakota Wheat Commission. North Dakota is the largest HRS-producing state in the country and is expected to produce 320 million bushels (8.70 MMT) in 2019. Cool, wet weather delayed spring wheat planting but boosted yield potential in the central and southern part of the state. In north-central North Dakota, HRS yields could be lower than USDA’s predicted 50.0 bu/acre (1.36 MT/hectare) due to unusually dry conditions that affected the crop throughout the summer. As of August 18, only 12% of the state’s HRS was harvested compared to 55% last year and the 5-year average of 43%. Peterson predicts the state’s HRS harvest could take off in the next couple of days if a pocket of cool, dry weather rolls through the state.

South Dakota. According to Reid Christopherson, Executive Director of the South Dakota Wheat Commission, “HRS harvest is extremely delayed. Unfortunately, the crop is ready to harvest; however, moisture and mud in the fields have stalled progress. Extreme humidity and frequent rains have allowed only a few hours of harvest per day when field conditions permit access.” Only 27% of the state’s HRS harvest is complete compared to last year’s 89% and the 5-year average of 75%. Based on early harvest data, South Dakota HRS test weights and protein levels look good, but continued moisture throughout the harvest could reduce kernel color. USDA expects South Dakota HRS yields to increase 12% over last year to 42.0 bu/acre (2.82 MT/hectare), but production is expected to fall 10% year-over-year as reduced planted area offsets increased expected yields.

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Reduced Wheat Production Estimates Boost Russian Export Prices

By Claire Hutchins, USW Market Analyst

Extremely high temperatures and below-average precipitation levels prompted USDA to reduce its Russian wheat production forecast from 78.0 million metric tons (MMT) in its June World Agricultural Supply and Demand Estimates (WASDE) report to 74.2 MMT in its July WASDE report. That is a 5% reduction month over month. Russia’s leading agriculture consultancies also reduced their Russian wheat production forecasts. Between June 11 and July 24, SovEcon reduced its 2019/20 Russian wheat production forecast by 10% from 82.2 MMT to 73.7 MMT. Between early June 12 and August 5, IKAR reduced its Russian wheat production estimate by 6% from 80.2 MMT to 75.5 MMT.

All sources point to lower Russian wheat production, but SovEcon and IKAR differ in how they see reduced exportable supplies affecting Russian export prices. Despite reducing its wheat production forecast, SovEcon estimates “Russia’s wheat crop issues are not big enough to impress the market.” Accordingly, it quoted Russian FOB values for 12.5 protein wheat (equal to 11.0 protein on a 12% moisture basis) at $197/MT on July 29 and at $195/MT on August 2. IKAR, on the other hand, believes the country’s reduced exportable supplies contribute to rising FOB values. According to IKAR, Russian FOB values for 12.5 protein wheat rose from $193/MT on July 23 to $196/MT on July 30.

How should these price differentials be interpreted? A look at recent tenders from Egypt’s state commodity-procurement agency, the General Authority for Supply Commodities (GASC) provides some insight. Through GASC, Egypt publicly offers to purchase wheat in set amounts from global exporters. Grain trading companies source wheat from multiple origins to bid on the GASC tenders, vying to offer the lowest FOB prices available. The tender results are available to the public, offering a clear picture of current export prices by origin source.

Often, conditions affecting exportable supplies in the Black Sea are apparent in GASC tender results. For instance, between May and July 2018, USDA reduced its Russian wheat production forecast by 7% on abnormally wet conditions affecting spring wheat planting and abnormally dry conditions affecting winter wheat areas. In 2018, for example, Black Sea supply concerns made their way into GASC’s tender results. On June 12, 2018, Russia’s lowest offer at the GASC tender was $209/MT FOB. By August 2, 2018, Russia’s lowest offer reached $235/MT FOB as supply concerns worsened.

While Russian 2019/20 wheat production is expected to increase 3% over 2018/19 levels to 74.2 MMT, its exportable supplies (beginning stocks plus production minus domestic consumption) are expected to fall 2.0 MMT from last year to 49.0 MMT in 2019/20. This year’s weather challenges are again present in recent Egypt’s GASC tender results. Between June 11 and August 6, the lowest FOB offer Russian wheat increased 4% from $197/MT to $204/MT. It is worth noting that the August 2 U.S. Wheat Associates (USW) Price Report estimated Gulf FOB export price for U.S. hard red winter (HRW) with equivalent protein for September delivery at $205/MT.

U.S. Wheat Associates (USW) believes these price trends could continue if hot, dry conditions persist across Russia’s predominant wheat growing regions.

Every month, USW publishes a graphic summary of the latest data from USDA’s WASDE report, including global wheat market factors, major country and regional export history and U.S. wheat supply and demand summaries by class. View the monthly summary here.

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Fair Weather and Adequate Soil Moisture on HRS Tour Predict Good Yield Potential

By Claire Hutchins, USW Market Analyst

This week, my colleague, Michael Anderson, and I joined four U.S. wheat customers from Mexico and Chile for the annual Wheat Quality Council (WQC) Spring Wheat Tour, an early survey of the 2019/20 hard red spring (HRS) crop in North Dakota and surrounding states. Today the tour estimated a final average yield potential of 43.1 bushels per acre (bu/ac) or about 1.17 metric tons (MT) per hectare for the 2019/20 North Dakota HRS crop. That is 5% higher than last year’s average of 41.1 bu/ac (1.12 MT/hectare). This year, tour participants made 371 stops to scout fields compared to 325 in 2018.

Each year, industry participants from across the United States and several countries gather in Fargo, N.D., and spend two and a half days in small scout teams, randomly stopping at several fields in a full day. Teams follow individual routes established many years ago by WQC to ensure most of North Dakota and parts of northern South Dakota and western Minnesota are scouted by tour participants. Teams measure yield potential, determine an average for the route and estimate a cumulative, daily tour average when all scouts come together again in the evening.

Twitter Post: Day 2 on #wheattour19. Yellow route, Car #3. Near Hensler, ND. 35 estimated bu/acre. Healthy looking wheat in the soft to hard dough stage.

Dusty boots. Another purpose of the tour is to help educate a broad range of stakeholders about wheat production challenges. Scouts are asked to look for disease, weed and insect pressure, as well as soil conditions. This year, scouts enjoyed warm, dry tour conditions, a big change compared to a very wet period from August 2018 well into this year. Soil moisture is still adequate in some parts of the region, but the July 16 U.S. Drought Monitor shows abnormally to severely dry conditions in north central North Dakota.

On the first day, the tour traveled from Fargo along routes covering most southern North Dakota counties. The cumulative first day average HRS yield potential was 45.6 bu/ac (3.07 MT/hectare), compared to 38.9 bu/ac (2.61 MT/hectare) in 2018, on adequate soil moisture conditions, warm weather and minimal disease or insect pressure. Participants surveyed 153 fields recording a range from 13.5 bu/ac to 96.2 bu/ac. We saw strong stands of healthy wheat that were three to four weeks from harvest, depending on weather. Fields were mostly dry but standing water could be seen alongside roads and fields. Temperatures were in the mid- to high-70s Fahrenheit (24 to 26 degrees Celsius) and moderate Fusarium Head Blight (also known as “scab”) development was seen along several routes.

Twitter Post: “Yellow route, east of Mapes, ND. Jack Detiveaux with @AmericanBakers is riding along with USW’s Claire Hutchins today. Estimated yield 48 bu/acre on 7″ rows.”

On the second day, teams traveled north and east through north central North Dakota where wheat does not compete as much with corn or soybeans for acreage as it does in the southeastern region of the state. Participants noted significantly larger fields, more mature wheat and less head scab pressure. The cumulative Day 2 average HRS yield potential was 40.6 bu/ac (2.74 MT/hectare), compared to 41.3 bu/ac (2.78 MT/hectare) in 2018. Participants surveyed 139 fields recording a range from as low as 14.2 bu/ac to a high of 74.7 bu/ac.

On the third day, participants traveled south and east back to Fargo for the final scout meeting hosted by the Northern Crops Institute (NCI). Teams noticed wetter field conditions, slight lodging, light scab pressure and more delayed overall crop development. The cumulative average HRS yield potential for the day was 48.6 bu/ac (1.32 MT/hectare), compared to 46.3 bu/ac (1.26 MT/hectare) in 2018.

Soil moisture impact. During the tour teams met many farmers in their fields. North Dakota farmers commented that beneficial rainfall throughout the spring and summer gave the 2019 HRS crop a boost over last year. Nearly every route averaged higher estimated yields on this wheat tour than the same routes in 2018, supporting farmer claims that 2019 could surpass 2018 harvest levels. One farmer near Wishek, N.D., expects 60 bu/ac on his farm due to cool temperatures earlier this spring and adequate soil moisture levels, which minimizes disease pressure and helps wheat yield potential. If realized, his farm would yield 39% higher than the tour’s total estimated average of 43.1 bu/acre (1.17 MT/hectare).

Days to harvest. Scouts on the tour identified most fields in the soft to hard dough stages, indicating harvest is two to five weeks away depending on weather. If warm, breezy conditions persist, some North Dakota farmers could begin the HRS harvest in as few as 20 days.

For more information, visit the WQC website at https://wheatqualitycouncil.org. Highlights and photos from the tour are posted on Facebook and Twitter using #wheattour2019.

Twitter Post: Yellow route, car #3. Near Barlow, ND. Estimated yield 37.3 bu/acre. A few spots of Fusarium Head Slight, but otherwise a good looking field.

 

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U.S. Wheat Prices Competitive with Corn for Domestic Feed Use

By Claire Hutchins, USW Market Analyst

According to USDA’s June WASDE (World Agricultural Supply and Demand Estimates) report, U.S. feed wheat consumption will increase 64% in marketing year (MY) 2019/20 to 3.81 million metric tons (MMT), compared to 1.36 MMT in MY 2018/19. U.S. Wheat Associates (USW) believes the current price relationship between domestic wheat and corn and the nutritional value of U.S. hard red winter (HRW) wheat and soft red winter (SRW) wheat support USDA’s estimates.

When the cash price gap between U.S. wheat and corn shrinks, wheat becomes an attractive feed ingredient for the cattle, swine and poultry industries. Per bushel, wheat is typically more expensive than corn, making it economically less practical as a staple ingredient in U.S. feedlots. However, recent market conditions are changing wheat and corn feeding ratios across the United States. The spot price gaps between U.S. winter wheat and corn have diminished, and even inverted, over the past several months as the potential for a bountiful wheat harvest offsets the potential for lower corn production due to late spring planting in the Midwest.

HRW can be substituted for corn as cattle feed in the High and Southern Plains where much of the country’s HRW wheat is grown. The cattle industry, predominant in Kansas and Texas, favors wheat as a feed ingredient when HRW is less than $1.00/bu more expensive than corn. Between early May and late June, the average cash price for wheat and corn increased steadily in both states, but the price gap narrowed and eventually inverted by early July.

In early May, the cash price for HRW in Kansas, the third largest cattle-producing state in the country, was $0.49/bu higher than corn. By early June, the price gap dropped to $0.29/bu. On July 1, the average cash price for both commodities settled around $4.06/bu and by July 5, HRW was $.06/bu cheaper than corn at $4.20/bu. According to Aaron Harries, Kansas Wheat Commission Vice President of Research and Operations, Kansas feedlots are already feeding more wheat than usual as managers respond to market incentives. Importantly, the decision to feed more wheat is made based on months of efficient market conditions as the ideal cattle diet consists of at least six months of a consistent ingredient blend.

Source: Reuters Eikon

In Texas, the largest cattle-producing state in the country, the recent spot price relationship between HRW and corn has been much tighter. In the first half of May, the cash prices for HRW and corn were nearly tied around an average of $3.92/bu. By early June, the average cash price for HRW dropped $0.24 below corn’s $4.50/bu. The cash-price relationship between wheat and corn is still inverted as of early July and HRW is, on average, $0.37/bu cheaper than corn.

“We are seeing a trend of feedlots purchasing more wheat directly from producers and elevators,” says Darby Campsey, Texas Wheat Producers Board, Director of Communications and Producer Relations. “Market conditions and wheat quality are increasing the value of wheat compared to corn in some cases.”

Campsey explains that in addition to market conditions, Texas livestock producers make grain purchasing decisions based on nutritional needs and local supplies. When wheat protein is lower than average, producers may be more likely to sell to feedlots, where quality requirements are slightly easier to meet than milling standards.

In the Midwest and South, where much of the country’s SRW is grown, swine producers are willing to pay more for wheat than corn because of wheat’s high nutritional value, according to Joel DeRouchey, Kansas State University professor in swine nutrition and management. Corn is used as a feed ingredient for swine because it is cheaper and a higher source of energy than wheat, but wheat brings a higher concentration of amino acids and phosphorous to the animal’s diet. The same market conditions affecting Kansas and Texas can be seen in Illinois and North Carolina, making wheat an even more attractive feed ingredient for swine producers.

In Illinois, the fourth largest swine-producing state in the country, the average spot price gap between SRW and corn decreased significantly between early May and early July. In early May, SRW was, on average, $.90 more expensive than corn. By July 8, the difference collapsed to $.50 as SRW prices continued their decline to $4.92/bu and corn prices continued their incline to $4.42/bu.

Source: Reuters Eikon

At an elevator in North Carolina, the second largest swine-producing state in the country, the spot price for corn surpassed the spot price for SRW between early June and early July. Between June 24 and July 5, the spot price for SRW sank from $4.82/bu to $4.38/bu while the price of corn hovered around an average $4.81/bu.

Wheat is also used as a corn feed substitute in the poultry industry due to its high protein content. Wheat becomes attractive to broiler producers when the price gap between SRW and corn narrows to $.50/bu. The average cash price for SRW in Kentucky, the seventh largest broiler producer in the country, decreased significantly between June 26 at $5.39/bu and July 5 at $4.91/bu, while the average price of corn increased from $4.36/bu to $4.60/bu. In early June, the average spread between SRW and corn was $.81/bu. As of July 5, the spread narrowed to just $.31/bu.

Source: Reuters Eikon

“I wouldn’t be surprised if more chicken producers are feeding wheat. Corn is preferred for chickens, because of its high energy levels, until corn prices rise too high, and right now cash prices for wheat and corn in Maryland are pretty close,” says Jason Scott, Maryland wheat farmer and USW past chairman. As of July 8, the average SRW spot price in Maryland, a top ten broiler producing state, was only $.10/bu higher than corn.

If the narrow or inverted price gaps between wheat and corn persist across the country, producers could continue to increase the amount of wheat used in feed blends for cattle, swine and poultry, potentially surpassing USDA’s estimate of 3.81 MMT.

Every month, USW publishes a graphic summary of the latest data from USDA’s WASDE report, including global wheat market factors, major country and regional export history and U.S. wheat supply and demand summaries by class. View the monthly summary here.

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U.S. Wheat Exports End Year Close to USDA Estimate

By Claire Hutchins, USW Market Analyst

Despite challenging market factors, U.S. wheat exports for marketing year (MY) 2018/19, which ended May 31, totaled 25.8 million metric tons (MMT) (948 million bushels), in line with USDA’s adjusted export volume estimate. That is 9% ahead of MY 2017/18 and 1% ahead of the 5-year average of 25.5 MMT (937 million bushels). Commercial sales of all classes of wheat in MY 2018/19 exceeded 2017/18 levels due to abundant exportable supplies, excellent harvest qualities, competitive export prices and sustained service from U.S. Wheat Associates (USW) representatives supported by its state commissions and USDA’s Foreign Agricultural Service programs. This offset the bearish factors including a strong U.S. dollar, competitor’s advantages, uncertainty about U.S. trade policies and difficult inland transportation logistics.

Hard Red Winter. USDA reported hard red winter (HRW) 2018/19 sales totaled 9.40 MMT (345 million bushels), 1% above 2017/18 and 1% above the 5-year average of 9.30 MMT (342 million bushels). Customers took advantage of the highest quality HRW crop in several years at attractive export prices compared to 2017/18. Out of the Gulf, between Jan. 1 and May 31, 2019, the average export price of U.S. HRW 12.0 protein (12% moisture basis) cost $227/metric ton (MT) compared to $257/MT over the same period in 2018. Sales to Mexico and Nigeria were up 6% and 36% respectively, while sales to Japan were down 6%. Sales to Mexico totaled 2.15 MMT (79.0 million bushels), 44% above the 5-year average of 1.49 MMT (55.0 million bushels), once again making Mexico the top HRW buyer. Commercial sales to Iraq, now the fourth-largest consumer of U.S. HRW, were in line with 2017/18 levels at 674,000 metric tons (MT) (24.7 million bushels).

Soft Red Winter. 2018/19 soft red winter (SRW) sales increased 33% year-over-year to 3.33 MMT (123 million bushels), still 14% below the 5-year average of 3.92 MMT (144 million bushels) despite difficult inland transportation logistical issues due to major flooding on the Mississippi River and its tributaries. The 2018/19 SRW crop boasted higher protein levels and good extensibility, making it a valuable blending ingredient for cookies and cakes. A steady decline in SRW futures prices between mid-December 2018 and mid-May 2019 encouraged strong commercial sales to top SRW-importing regions. Export sales to three of the top five SRW purchasers increased or remained steady compared to 2017/18. Sales to Mexico, the top importer of U.S. SRW, increased 25% over last year to 917,000 MT (33.6 million bushels) and sales to Peru, the fifth-largest importer of U.S. SRW, increased 13% over last year to 175,000 MT (6.46 million bushels). Export sales to Nigeria held strong at 272,000 MT (9.96 million bushels).

Hard Red Spring. By the end of MY 2018/19, hard red spring (HRS) export sales totaled 7.15 MMT (263 million bushels), 16% ahead of last year’s pace, despite a 94% decrease in commercial sales to China, formerly the fourth-largest importer of U.S. HRS. A 60% year-over-year increase in HRS production, at 16.0 MMT (588 million bushels), higher ending stocks, high protein content and competitive export prices all supported export sales. Gulf exports of HRS 14.0 protein between Jan. 1 and May 31, 2019, cost, on average, $263/MT compared to $305/MT over the same period in 2018. Seven of the country’s top ten HRS-importing partners increased commercial sales year over year. Commercial sales to the Philippines, the top importer of U.S. HRS, jumped to 1.85 MMT (68.0 million bushels) in 2018/19, 39% ahead of last year and 38% ahead of the 5-year average of 1.34 MMT (49.2 million bushels).

White wheat. Total commercial sales of soft white (SW) and hard white (HW) wheat climbed to 5.45 MMT (200 million bushels) in 2018/19, which includes about 165,000 MT of HW sales to Nigeria. That is slightly ahead of last year’s pace and 21% ahead of the 5-year average of 4.51 MMT (166 million bushels) due to increased production, increased exportable supplies and below-average protein levels compared to years prior. Sales to the Philippines and Japan, the top two importers of U.S. SW, respectively, increased 13% and 7% over 2017/18 levels. The Philippines purchased 1.32 MMT (48.9 million bushels) of SW compared to 1.17 MMT (43.0 million bushels) in 2017/18. White wheat sales to Japan increased to 889,000 MT (32.7 million bushels) compared to 829,000 MT (30.4 million bushels) in 2017/18.

Durum. USDA reported 2018/19 durum sales at 504,000 MT (19.8 million bushels), up 24% from the year prior, but 12% below the 5-year average of 573,000 MT (21.0 million bushels). Increased production, high protein content, excellent kernel characteristics and competitive prices throughout the marketing year all supported northern durum export levels. Increased sales to four of the five top markets for U.S. durum boosted export figures. The European Union (EU) purchased 290,000 MT (10.7 million bushels) of U.S. durum in 2018/19, up 71% year-over-year following a drought that cut production in many EU countries.

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Blockchain in Agricultural Commodity Trading: Dream or Reality?

By Tanner Ehmke, Manager, Knowledge Exchange, CoBank; Reprinted with permission;
View the original report here.

Key Points:

  • Blockchain innovations in agriculture are numerous but have been slow to gain industry-wide acceptance, particularly in global agriculture commodity trading.
  • Previous attempts to digitize trade finance with tools like bank payment obligation (BPO) have been slow to take hold, raising doubts among market participants of new digitalization efforts like blockchain.
  • Commodity agricultural trade faces unique challenges, including the blending of grain along the supply route, and the lack of digital documentation within sections of the supply chain.
  • Digital solutions are quickly evolving, creating an environment where blockchain technologies may be more viable in ag commodity trading in the near future.
  • Investment in storage, transportation, and sensors to segregate and track commodities through the supply chain is necessary to give buyers visibility, with high-value or value-added commodities like non-GMO and organic grain where provenance and tracking are desired.

Introduction

Blockchain, the distributed ledger technology behind cryptocurrencies like Bitcoin where identical records of transactions are stored on multiple computers, is still in its infancy but has seen a flood of pilot programs and proof-of-concepts from companies around the world as they race to harness its power of transparency. The agriculture and finance industries in particular have captured the spotlight as ripe for disruption by blockchain technologies. Adoption of most blockchain technologies across agriculture, however, has been limited to date. Banks and agribusinesses nonetheless remain keen on finding distributed ledger solutions to deploy industry-wide and potentially achieve efficiencies from faster transaction speeds, less cumbersome documentation, and simpler and faster payments between buyers and sellers around the world.

EXHIBIT 1: Process of Domestic Supply Chain for U.S. Soybean Export via Barge; Graphic Source: CoBank

Other digital solutions that promised to transform the commodity trading sector, such as bank payment obligation (BPO), are recent reminders that change can be hard work without industry-wide acceptance. Until numerous roadblocks to blockchain solutions are resolved, such as a lack of a digital ecosystem for paperwork like bills of lading and letters of credit for parts of the supply chain; improvement in global industry protocols in quality; standards in language; investment in storage and transportation for segregation; and technological advancements in sensors to monitor movement of commodities along complex trade routes, industry-wide adoption of blockchain in agricultural commodity trading will struggle to grow beyond proof of-concept. But, if successful, blockchain could be transformative across the sector, bringing value across the supply chain from producers to consumers.

Complex Supply Chains

Blockchain applications for agriculture abound. Ripe.io, GrainChain, AgriDigital, OriginTrail, and IBM Food Trust are just a few of the blockchain-based technologies created for commerce in agriculture. Yet in the complex global agricultural commodity space where crops like corn, soybeans, and wheat are blended from numerous farms and pass through multiple hands before reaching the final destination, a blockchain solution that links the supply chain and creates transparency of transactions from beginning to end remains in idea phase. The biggest challenge for the widespread adoption of blockchain technologies in agricultural commodity trading is the complexity within the chain of custody (Exhibit 1). Grain leaving the farm is often comingled at a country elevator, then blended again at a rail or barge loading facility, then comingled again at the export facility where it is loaded on an ocean vessel for export. At the receiving port overseas, grain will likely be blended even more after off-loading the vessel.

EXHIBIT 2: Grain Ocean Vessels Loaded, by Port Region; Graphic Source: CoBank

Digitizing even portions of the supply chain could create huge cost savings for grain handlers. The physical delivery of documents like bills of lading, letters of credit, contracts, letters of intent, and invoices is cumbersome. While costs of shipping documents are negligible and could be eliminated with a blockchain platform, the cost and risk of important documentation arriving late could be far greater. If documents to the receiver of the grain do not arrive on time, the shipper must pay the cost of demurrage for every day the barge, rail car, or vessel sits idle. Cost of demurrage per barge, for instance, can run about $300/day. Demurrage is a charge for failure to load or unload barges, rail cars, or ocean vessels within the time allowed.

A non-blockchain based digital solution currently is being evaluated by a consortium of agribusinesses for barge freight on the Mississippi River for the purpose of reducing paperwork and creating seamlessness in transactions between companies. Paperwork such as bills of lading and letters of credit have digital forms for ocean vessels, but are in paper form for barge traffic on the Mississippi River, which is an important logistical leg of the global agricultural commodity supply chain. Digitizing paperwork on the Mississippi River export route offers the greatest potential for blockchain solutions in global agricultural commodity trading. The majority of U.S. ocean-going vessels loaded with grain depart from the New Orleans region (Exhibit 2).Barge traffic for grain on the Mississippi River regularly exceeds 15,000 barges/year (Exhibit 3). The plethora of documents in the grain trade that must be digitized for seamlessness across the supply chain includes but is not limited to:

  • Letters of credit
  • Bills of lading
  • Trading slips
  • Certificates on weights, grades, phytosanitary
    specifications, fumigation, and origin.

Additionally, the industry would need agreement on where in the supply chain the data would be committed to the blockchain, such as at the barge or rail car loading facility, or at the farmer’s field. The data on a blockchain for grain traded on the inland river system would then also have to be integrated with systems for ocean-going vessels heading to international markets, thereby requiring international standards for data and governance.

EXHIBIT 3: Grain Barges Unloaded in New Orleans; Graphic Source: CoBank

Disillusionment

Previous attempts to digitalize trade finance were heralded as transformative but have yet to change the status quo in global trade. In recent years, the bank payment obligation (BPO) was created with significant investment and promised faster handling of goods, payment at due date, and faster receipt of trade documents. The lack of wide-spread adoption of BPO has raised doubts among market participants of new digitalization efforts like blockchain. A blockchain platform may not be adopted industry-wide despite significant investment and coordination, particularly in emerging markets where there is frequently a lack of consistency in technology. Or, if successfully adopted, a blockchain platform could itself be disrupted by yet another new technology. Questions about ownership of data on a distributed ledger have also raised concerns. Trading firms want information to be private. If chain of custody information is visible for anyone on the supply chain to see on a distributed ledger where each market participant or node would have access to all documentation, merchandisers will be reluctant to use
a blockchain platform. Who will gain access as a node in the blockchain will require governance and rules, thereby requiring a governing body trusted by all parties of the supply chain to host nodes and validate transactions. Blockchain would not reduce or eliminate the need for regulators. Maintaining the quality of information that is inputted into the blockchain would require a licensed inspector who might need access to the blockchain to see documents and integrate their certification information on grading. A regulator or third party would also still be needed to define responsibilities, rules, and regulations of supply chain participants despite blockchain widely thought of as a technology that would replace trusted intermediaries. With the huge volume of shipments moving outside of the U.S., cooperation from international buyers is required to create the protocols necessary for blockchain in agricultural commodity trading to flourish. However, the current geo-political climate – especially with the U.S. and important trading partners like China – raises doubts about achieving a globalized trading system on a blockchain.

Blockchain’s application in the ag commodity trade may also be limited to only portions of the supply chain. If farmers and country elevators are not incentivized either through cost savings or gain in value, adoption of blockchain will be limited to segments further down the supply chain.

Evolution

Despite major challenges impeding blockchain’s use in the global grain trade, the potential opportunities achieved through a distributed ledger system could be significant. Blockchain could potentially expedite borderless clearing, help facilitate digitally validated chains of custody through choke points like barge and train loading facilities, allow buyers and sellers to follow a shipment through various chains of custody, lower the cost for clearance of goods, eliminate duplicated inspections at ports, lower risk of demurrage, assist with payment, mitigate counter-party risk, and greatly reduce the risk of errors and fraud. Corn, which has the simplest trade specifications under the Federal Grain Inspections Service (FGIS) would be the easiest commodity to adopt into a distributed ledger platform, followed by soybeans and wheat. If provenance is important, sharing knowledge of the entire chain of custody will be necessary for commodities like non-GMO and certified organic. Through investment in grain storage and transportation for segregation, greater transparency in the supply chain to segregate other attributes, including but not limited to:

a. High-oleic oil content for soybeans
b. Protein content
c. Foreign matter
d. Moisture levels

Further investment in electronic sensors to trace, validate, and verify quality attributes, though, would be required to make transparency possible along the complex commodity trading route. With sensors in place, a blockchain platform could evolve to include payment systems within “smart contracts” that automatically execute transactions without human intervention as the product moves through the supply chain. However, a distributed ledger system that shares this information would also need to protect proprietary information held only between buyers and sellers.

Conclusion

The challenges of industry-wide adoption of blockchain technologies for agricultural commodity trading are ample, but so are the potential benefits. Greater visibility in the supply chain will create value for many, but standards will change. The winners in a hypertransparent environment will be those who have the ability to segregate and capture higher value in the commodity chain. Those who struggle to adapt will be those with limited ability to segregate. Experiences with prior efforts to digitize trade have raised the level of caution for blockchain. High investment into blockchain may not result in industry-wide adoption. If successfully adopted, a blockchain platform could crowd out small players. It could also be disrupted by yet another new technology.

To be successful, a blockchain platform bringing transparency to an entire supply chain would need to be private and secure from outside parties. Only invited parties or nodes would be allowed to view the data on transactions for traders to be confident that proprietary information is not made public. This would require a governing body to determine who is allowed to participate on the blockchain.

Global standards and protocols will also need to be established. Given the current geo-political and global trade environments, such an evolution in international cooperation will likely be years in the making.

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Increasing U.S. Rail Costs Hurt the World’s Wheat Buyers

By Claire Hutchins, USW Market Analyst

Railroad rates and charges paid by customers who ship wheat and other grains make up a large portion of basis and have a direct effect on the price overseas buyers pay for U.S. wheat. Unfortunately, the cost of shipping wheat by domestic rail has been increasing at a rapid pace.

U.S. Wheat Associates (USW) and many of its state wheat commission members are spending more time investigating and commenting on the potentially adverse effects of increasing rail rates and separate charges on our overseas customers, shippers and even local farmers.

U.S. railroads are a crucial part of the most efficient grain supply system in the world. The rail system fulfills an essential logistical function that neither grain handlers nor farmers can perform on their own. Wheat must compete for limited rail capacity with other grains as well.

USW, however, has learned that since June 2014, the cost of wheat shipments has increased substantially, due at times to higher basic rates for shipping wheat and to added “demurrage” and “accessorial” (D&A) charges by Class 1 railroads (those with the largest systems). Demurrage charges occur when shippers do not receive, load or unload freight within a certain time period determined by the railroads. Accessorial charges are added to base transportation charges and can include demurrage, as well as costs to weigh rail cars, diversions from normal routes and other costs.

Recently, USW observed how agriculture is not the only industry negatively affected by these additional charges. USW joined more than 100 representatives across many sectors May 22 to 23, 2019, at a hearing held by the U.S. Surface Transportation Board (STB) to assess the fairness, reciprocity and efficiency of railroad D&A charges. The STB is a federal regulatory board that has broad economic oversight of U.S. railroads, trucking companies, water carriers and other transportation groups.

At the hearing, diverse stakeholder voices united under two common themes: D&A charges heavily favor Class 1 railroads and do little to improve overall service provided by railroad companies to shippers, receivers and intermediaries. Many shippers at the hearing said circumstances often prevent them from meeting what they consider strict railroad loading and unloading schedules, thus incurring the D&A charges. In some cases, stakeholders said they had to invest tens of millions of dollars in new infrastructure to accommodate railroad scheduling to avoid further demurrage costs.

In the case of wheat, as rail costs increase, the grain handlers may try to recover these costs by offering higher grain prices to terminal or export elevators and, some in the industry believe, by offering lower prices to farmers. As basis increases, overseas buyers must pay more for all classes of wheat out of the Gulf and the Pacific Northwest and that affects demand.

As rail costs increase, the grain handlers may try to recover these costs by offering higher grain prices to terminal or export elevators and, some in the industry believe, by offering lower prices to farmers.

Representatives from Class 1 railroads also attended the STB hearing and made the point that efficiency is good for all parties in the supply chain. They unilaterally agreed that D&A charges incentivize shippers to make more efficient loading and unloading decisions, which improves overall efficiency.

USW hopes the STB will carefully consider industry perspectives when assessing the fairness and efficiency of D&A charges because wheat producers and customers alike are adversely affected by increasingly high rail costs. USW believes lower rail costs could help U.S. wheat be even more competitive in a global marketing environment where only a small change in cost can make a big difference for farmers and their customers.

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New Crop HRW Demand is Up Significantly

By Claire Hutchins, USW Market Analyst

As of May 16, total U.S. hard red winter (HRW) commercial sales for delivery in new marketing year 2019/20 reached a record 1.08 million metric tons (MMT). Weekly commercial sales of HRW for delivery in 2019/20 since early March 2019 are, on average, more than four times higher than new marketing year sales in 2017/18 for delivery in 2018/19 and are double each week’s 5-year average. Significant increases in new marketing year HRW exports to Algeria, Iraq, Nigeria, Saudi Arabia and Thailand contribute to the boost in 2019/20 sales.

Analysts attribute higher demand volume to ample exportable supplies and competitive global pricing.

U.S. Wheat Associates (USW) publishes a weekly commercial sales report every Thursday on Facebook, Twitter and here on its website.

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