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Shrinking Global Wheat Production Could Be Bullish for Farmers

By Stephanie Bryant-Erdmann, USW Market Analyst

USDA updated its monthly World Agricultural Supply and Demand Estimates (WASDE) on August 10 and expects the global wheat supply and demand situation to be more favorable for U.S. farmers this year due to shrinking global wheat production. USDA lowered its global wheat production estimate by 6.63 million metric tons (MMT) to 730 MMT, down 4 percent year over year and the lowest level since 2014/15, if realized.

Widespread drought across Germany and northern Europe is one reason why USDA dropped its production forecast. USDA expects European Union total wheat production to fall to 138 MMT, 9 percent below both the 5-year average and 2017/18 production. With smaller EU wheat production, USDA lowered marketing year 2018/19 (June 1 to May 31) EU wheat exports to 23.0 MMT. If realized, that would be 2 percent below the year prior, and 25 percent below the 5-year average.

At the same time, USDA also expects Russian wheat production to fall 20 percent year over year to 68.0 MMT due to unfavorable winter wheat planting and growing conditions. With Russian wheat supplies shrinking, the 2018/19 Russian wheat export forecast is down 7.00 MMT from 2017/18 to 35.0 MMT.

With lower exportable wheat supplies (production plus beginning stocks minus domestic consumption) in Russia and the EU, USDA expects the United States to have the largest exportable supply of wheat in the world in 2018/19 at 49.7 MMT.

Consequently, USDA expects 2018/19 U.S. wheat exports to reach 27.9 MMT, up 14 percent from 2017/18 and 7 percent above the 5-year average, if realized. Still, U.S. wheat export sales pace will need to increase to meet this goal, as year-to-date U.S. wheat export sales total just 7.53 MMT or 27 percent of USDA’s anticipated total.

The shrinking global wheat supply, increasing global wheat consumption and large U.S. wheat supply have all lead to U.S. wheat futures rallies over the past month. Since the last WASDE update on July 12, U.S. HRW futures are up 72 cents per bushel ($26 per MT), SRW futures grew 54 cents per bushel ($20 per MT) and HRS climbed 67 cents per bushel ($25 per MT).

Each month, U.S. Wheat Associates (USW) updates a graphic summary of USDA’s WASDE (World Agricultural Supply and Demand Estimates) report. View the August summary here.

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Ahead of USDA Report, Wheat Futures on a Powder Keg

By Stephanie Bryant-Erdmann, USW Market Analyst

Wheat prices are in for a wild ride. Just last week, all it took to trigger a limit up move in futures prices was a rumor that Ukraine might restrict milling wheat exports. Although the market took back most of those gains after the rumor was retracted, Chicago soft red winter (SRW) futures ended the week up 5 percent while Kansas City hard red winter (HRW) climbed 6 percent and Minneapolis hard red spring (HRS) increased 3 percent.

That short-term volatility is indicative of how tightly wound global wheat markets are, and the next big price move could be triggered on Aug. 10 when USDA updates its monthly World Agricultural Supply and Demand Estimate (WASDE). We will look for factors that could trigger additional price moves including changes to production, export demand and world feed grain supply estimates.

Shrinking Global Wheat Production. A saying among wheat people suggests that at harvest, “big crops get bigger and small crops get smaller.” This seems to be a “small crop” year with analysts and traders alike expecting USDA to reduce world production estimates based on new harvest numbers from France, Germany, Poland and Russia. Current estimates from Stratégie Grains put EU common wheat production (excluding durum) below 130 MMT, down 8 percent year over year if realized.

The Russian Ministry of Agriculture expects 2018/19 Russian wheat production to total 64.4 MMT, down 25 percent from the year prior. According to analysts at IKAR, sprouting and disease pressure from late season rains further decreased Russian exportable supply. Australian wheat production may also be reduced as the region that produces Australian Prime Hard and Australian Hard wheat is experiencing “the worst drought in living memory.”

Bullish supply news has pushed both U.S. and global wheat prices higher in recent weeks. Since July 13, U.S. HRW futures are up 75 cents per bushel ($28 per metric ton [MT]), SRW futures grew 59 cents per bushel ($22 per MT) and HRS climbed 81 cents per bushel ($30 per MT). At the same time, free-on-board (FOB) prices paid by Algeria and Egypt for wheat in public tenders have increased an average 90 cents per bushel ($33 per MT).

Changes to Wheat Exports. United States. Despite global FOB wheat prices climbing at a faster rate than U.S. wheat futures, U.S. wheat exports remain slow. Through July 27, U.S. wheat export sales totaled 7.20 MMT, down 28 percent from 2017/18. That pace must quicken soon to meet USDA’s current U.S. wheat export forecast of 26.5 MMT.

Ukraine. Each year, the Ukraine Agricultural Ministry signs a memorandum with grain exporters outlining an agreed volume of milling wheat trade not subject to government restriction. This year, the proposed volume is 8.0 MMT, down from 10.0 MMT exported in 2017/18. Milling wheat exports generally make up a little more than half of the country’s wheat exports. In July, USDA forecast Ukraine total wheat exports (milling and feed wheat) at 16.5 MMT, down 1.0 MT from 2017/18.

Decreases to the Global Feed Grain Supply. While higher wheat prices would normally ration feed wheat demand, tightening global feed grain supply and demand is creating a price floor for global wheat prices. USDA expects global feed grain consumption — barley, corn, mixed grains, oats, rye and sorghum — to outpace global feed grain production by 34.1 MMT in 2018/19. With global consumption outpacing global production for the second year in a row, USDA anticipates global feed grain ending stocks falling to 179 MMT, the lowest level since 2012/13.

As we have suggested (Lower U.S. Wheat Prices Are an Anomaly and An Excellent Opportunity), U.S. and global wheat prices are sitting on a powder keg with an anticipated global stocks-to-use ratio (excluding China) of 19 percent, a level that has not been seen since 2007/08. Both U.S. and global wheat prices have rallied in recent weeks. Continued reports of quality damage and lower yields in the EU and Russia and drought conditions in Australia indicate the 2018/19 crop is shrinking. If last week’s limit up movement is any indication, wheat prices could go much higher very quickly if additional bullish news comes out.

To track U.S. wheat export basis levels and prices, subscribe to the USW Weekly Price Report.

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Annual Spring Wheat Tour Sees Improvement from 2017 Drought Impact

By Amanda J. Spoo, USW Assistant Director of Communications

This week, the Wheat Quality Council hosted its annual hard red spring (HRS) and durum crop tour. Participants spent three days mainly in North Dakota surveying this year’s crop and estimating yield. The tour, which surveyed a total of 342 fields, estimated weighted average HRS yield at 41.1 bushels per acre (bu/a), slightly higher than last year’s HRS average of 38.1 bu/a, which was impacted by ongoing drought conditions in western areas. The durum weighted average yield was 39.3 bu/a, in line with last year’s average of 39.7 bu/a, which was a decline from 45.4 bu/a in 2016. While the overall crop looks better than last year, it is still below the tour’s 5-year average of 45.4 bu/ac.

Participants on the tour always represent a wide range of the wheat industry, including millers, traders, farmers, researchers, government officials and media who travel along eight distinct routes covering most of the state’s wheat production.

“The continuing success of this tour is that we make it a value-added experience,” said Wheat Quality Council Executive Vice President Dave Green. “We keep training more and more people and that makes a difference across this industry.”

On the first day, participants drove west from Fargo to Bismarck, with two routes going farther into the western part of the state, and others covering western Minnesota and northern South Dakota. The Day 1 weighted average yield was 41.1 bu/a, up from 38.8 bu/a in 2017. For HRS specifically, the yield was 41.3 bu/a, down from 37.9 bu/a in 2017. The scouts surveyed 138 fields on Day 1, of which 135 were HRS and 3 were durum.

On Day 2, the tour surveyed 148 fields, 135 of which were HRS and 13 were durum. The group moved from Bismarck to Devils Lake. The overall average for Day 2 was 38.8 bu/a, up from 35.7 in 2017. For HRS, the yield was 38.3 bu/a, up slightly from 35.8.

The third day of the tour included a half day of crop surveying. The participants then all returned to North Dakota State University’s Northern Crops Institute in Fargo to compile the overall crop report. On Day 3, participants surveyed at total of 55 HRS fields and one durum field. The Day 3 weighted average yield for HRS was 45.6 bu/a, down slightly from 46.2 bu/a in 2017.

The results reflect a snapshot of yield potential observed by the participants in the fields they scouted.

“I think what we saw was kind of encouraging in part because there had been concern about scab with this crop, but we saw a lot of spraying for it; and we never felt that more than a handful of fields had a serious scab problem,” said Green. “And we were scouting for it, so we were very positive about what we saw.”

Green added, “I’m also positive that we thought we were headed for a lower protein record relative to how good everything looked going in, but I wouldn’t say the same thing now that we’ve seen the crop. I think it is going to have a wide range of protein and a lot of choices for buyers. I would anticipate that with the heat that us on the crop, the quality is going to be better than normal.”

View highlights and photos from the tour by searching #wheattour18 on Facebook and Twitter. For more information and for results from previous tours, visit the Wheat Quality Council’s website at www.wheatqualitycouncil.org.

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Lower U.S. Wheat Futures: An Anomaly and Excellent Opportunity

By Stephanie Bryant-Erdmann, USW Market Analyst

 

There is an old saying: “When there’s blood on the streets, buy property.” Given recent price movements, that could easily be changed to: “When trade policies are in the news, buy wheat.”

 

Since the steel and aluminum tariffs went into full effect for major U.S. wheat customers, September Kansas City hard red winter (HRW) wheat futures have fallen 51 cents per bushel ($19 per metric ton [MT]), September Chicago soft red winter (SRW) wheat futures dropped 25 cents per bushel ($9 per MT) and Minneapolis hard red spring (HRS) plunged 58 cents per bushel ($21 per MT).

 

Seasonal harvest pressure always impacts U.S. wheat prices during the summer months; however, this year the unique trade environment is also pressuring export demand and driving U.S. wheat prices lower. As of July 19, U.S. export sales for marketing year 2018/19 (June 1 to May 31) totaled 6.43 MMT, down 32 percent year over year. Exporters note that customers are choosing to purchase smaller than normal volumes of U.S. wheat, just what they need for the short-term or are waiting to make purchases, noting uncertainty about U.S. trade policies and their own countries’ retaliatory measures. Sales to the top five U.S. wheat customers — Mexico, Japan, the Philippines, Korea and Nigeria — are 27 percent behind last year’s pace.

 

Futures v Global S&D

U.S. wheat futures prices are not reflecting global supply and demand realities. Buyers are uncertain about the effects of unforeseen tariff wars and have altered their typical wheat import cadences.

With trade policy issues dominating the headlines, U.S. wheat futures markets are mostly ignoring global wheat supply and demand fundamentals, which can be seen in competitors’ wheat prices. The average global wheat price is up 41 cents per bushel ($15 per MT) with larger increases noted in Australia and Argentina, which compete with the United States in key quality-driven markets. According to International Grains Council (IGC) data, the average price of Australian wheat is up $19 per MT and the average price of Argentine wheat is up $75 per MT. These price increases are driven by increased global wheat demand, shrinking global wheat supplies and their location.

 

USDA noted in last week’s World Agricultural Supply and Demand estimates that global wheat production will fall to 737 MMT in 2018/19, the first drop in 5 years and down 3 percent from 2017/18. Decreased production is expected in the European Union (EU), Russia, Ukraine, Kazakhstan, and Australia. While the United States, Canada and Argentina are expected to have increased production, exporter supplies are expected to fall 20.2 MMT year over year.

 

Simultaneously, many importers are engaging in “just in time” purchases since wheat price movement has rewarded their patience the last few years. USDA expects importer ending stocks to fall to 49.8 MMT in 2018/19, the lowest amount in a decade.

 

While importer stocks are shrinking, USDA expects global wheat demand to surge to a new record high of 749 MMT, 4 percent above the 5-year average. That means that global wheat consumption will outpace global wheat production by 12.6 MMT this year and drop the global wheat stocks-to-use ratio (excluding China) to less than 20 percent. A level that has not been seen since 2007/08.

 

For perspective, in July 2007 all three wheat futures were above $6.00 per bushel ($220 per MT) and would continue climbing until March 2008 when prices peaked at $11.60 per bushel ($426 per MT) for SRW, $12.17 per bushel ($447 per MT) for HRW and $17.30 per bushel ($636 per MT) for HRS. On Friday, July 20, those three futures were at $5.16 per bushel ($190 per MT), $5.08 per bushel ($187 per MT) and $5.55 per bushel ($204 per MT), respectively, indicating there is a lot of room for upward mobility.

 

With exporter supplies shrinking and importers continuing a “just in time” purchasing pattern, global wheat prices are sitting on a powder keg that trade policy issues are currently disguising. Customers should take advantage of current U.S. futures price levels and lock in the competitive prices.

 

To track U.S. wheat export prices, subscribe to the USW Weekly Price Report.

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USDA Decreases World Wheat Production on Dry Conditions

By Stephanie Bryant-Erdmann, USW Market Analyst

USDA raised 2018/19 U.S. wheat production to 51.2 million metric tons (MMT), up 8 percent from 2017/18, if realized. Along with the increase, USDA also released its first U.S. by-class forecast for U.S. wheat. Increases in hard red spring (HRS), soft red winter (SRW) and soft white (SW) wheat are expected to more than offset a 12 percent year over year reduction in hard red winter (HRW). U.S. spring wheat production is expected to increase to 15.9 MMT, up 52 percent from the previous year when drought shriveled the crop.

But while wheat production is expected to increase in the United States, it is expected to fall globally in 2018/19. USDA forecast 2018/19 total world wheat production at 736 MMT, down 3 percent from the year prior, if realized. The largest decrease is expected in Russia, which is forecast to produce 67.0 MMT, down 18.0 MMT from 2017/18 due to poor growing conditions. Wheat production is also expected to fall in the European Union (EU) and Australia due to dry conditions.

While 2018/19 world wheat production is expected to fall for the first time in 5 years, world wheat consumption is expected to grow 5.23 MMT from the previous year to 749 MMT. If realized, world wheat consumption will outpace world wheat production by 12.6 MMT in 2018/19.

With consumption outpacing production, world wheat ending stocks are expected to fall to 261 MMT, down 5 percent from 2017/18. The reduction in ending stocks puts the 2018/19 global stocks-to-use ratio (excluding China) just under 20 percent, which is the lowest level since 2007/08.

 

 

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Strong Demand Pushes Global Wheat Prices Higher

By Stephanie Bryant-Erdmann, USW Market Analyst

With the world consuming more wheat than it produces for the first year since 2012/13, prices are also on the rise. According to Global Trade Atlas data, the average global wheat price increased 4 percent year over year to $203 per metric ton (MT) in 2017/18 (June 1 to May 31). Most of that price increase occurred in the last five months of the marketing year as the market digested lower Northern Hemisphere wheat production estimates and strong demand for 2018/19.

Here is a by-country look at current production estimates and the average wheat prices (noting that prices vary by class and quality) from major exporting countries and regions.

United States. According to the U.S. Wheat Associates Price Report, the average price for U.S. wheat rose an average $47 per MT from one year ago. Hot, dry conditions in the U.S. hard red winter (HRW) growing region decreased yield potential and pushed prices up for this largest U.S. wheat class. USDA forecasts U.S. 2018/19 wheat production at 49.7 million metric tons (MMT), up 5 percent year-over-year, but still 11 percent below the 5-year average. U.S. beginning stocks are estimated at 29.4 MMT, down 8 percent from 2017/18, but still 28 percent above the 5-year average. Increased U.S. wheat production is expected to offset the lower U.S. beginning stocks and total U.S. supply is expected to remain stable year over year at 79.1 MMT.

Canada. The International Grains Council (IGC) reported the average price for Canada Western Red Spring (CWRS) at 13.5 percent protein (13.5 percent moisture basis) from Vancouver rose to $255 per MT in May. This is up $24 per MT from May 2017 and reflects the tighter global supply and demand picture. On June 21, Agriculture and Agri-Food Canada (AAFC) forecasted 2018/19 common wheat production (excluding durum) at 25.4 MMT, up slightly from 2017/18. A 15 percent bump in spring wheat planted area contrasts with an 11 percent drop in winter wheat planted area. Predicted 2018/19 durum production will increase 15 percent to 5.7 MMT due to an 11 percent year over year increase in planted area. The global supply and demand situation for durum wheat is also supporting prices. Canadian durum prices at $282 per MT are an average $7 per MT above 2017 levels.

European Union (EU). IGC reported the average French wheat price reached $205 per MT in May, up from $187 per MT the year prior. French production is expected to increase to 37.8 MMT, up 4 percent due to higher expected yield and larger planted area. 2018/19 EU wheat production is expected to fall 1.80 MMT from 2017/18 to 140 MMT according to Stratégie Grains, which is providing continued price support for exportable French supplies.

Australia. The current average price for Australian wheat of $239 per MT is up 22 percent year over year according to IGC data, which point to lower carry-in stocks and hot, dry conditions. In June, the Australian Bureau of Agricultural and Resource Economics and Science (ABARES) forecasted 2018/19 Australian wheat production to rise 3 percent from 2017/18 to 21.9 MMT, despite a 3 percent decrease in planted area to 29.5 million acres (12.0 million hectares).

Argentina. In May, the average price for Argentine wheat reached $261 per MT according to IGC data. That is up 38 percent year over year. This month, the Buenos Aires Grain Exchange reported Argentine farmers see higher revenue potential and expects them to plant 7 percent more area to wheat in 2018/19, reaching 15.1 million acres (6.1 million hectares). USDA’s June estimate for 2018/19 Argentina’s wheat production was 19.5 MMT (716 million bushels), up 8 percent from 2017/18 and 35 percent greater than the 5-year average.

Black Sea (Russia, Ukraine and Kazakhstan). The average price for Russian 4th grade milling wheat (8.8 to 10.5 percent protein on a 12 percent moisture basis) reached $213 per MT in May, up 14 percent from the year prior according to IGC. Expectations for lower 2018/19 production in the Black Sea region are supporting export prices. USDA projects combined 2018/19 output from Russia, Ukraine and Kazakhstan will drop 14 percent to 109 MMT (4.00 billion bushels) based on an expected return to trendline yields. If realized, the combined harvest would still be greater than the 5-year average.

At the end of May, the Russian Meteorological Service noted hot, dry conditions threatened winter wheat in Russia’s southern regions, which have not received rain since April. Conversely, cold wet weather is delaying spring wheat planting in other regions. To date, 23.3 million acres (9.43 million hectares) of spring wheat has been planted, compared to the 2017/18 total spring wheat area of 30.9 million acres (12.5 million hectares). Russian consultancy SovEcon forecasted Russian wheat production to decline to 77.0 MMT (2.83 billion bushels), down 10 percent from 2017/18.

UkrAgroConsult reported Ukrainian wheat planted area increased 2 percent year over year to 15.5 million acres (6.28 million hectares). The Ukrainian meteorological service expects wheat yields to fall 8 percent year over year to 56.5 bu/acre (3.80 MT/ha). 2018/19 Ukrainian wheat production is forecast at 23.9 MMT (878 million bushels), compared to 25.4 MMT (933 million bushels) in 2017/18.

IGC expects yield declines and smaller planted area will lower Kazakhstan wheat production to 13.7 MMT (503 million bushels), down 7 percent from 2017/18, if realized.

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USDA Report Shows U.S. Wheat Farmers Have What the World Needs

By Stephanie Bryant-Erdmann, USW Market Analyst

In its June World Agriculture Supply and Demand Estimates (WASDE), the U.S. Department of Agriculture (USDA) noted that global wheat consumption is expected to exceed global wheat production for the first time since 2012/13 (June 1 to May 31). USDA estimated 2018/19 global wheat consumption at a record 751 MMT, up 7.7 MMT from 2017/18. Human consumption is driving this growth and is expected to increase 2 percent or 10.5 MMT, which is good news for everyone involved in the milling wheat supply chain, including U.S. farmers who are uniquely positioned to meet the demand.

 

In 2018/19, the United States will hold the largest exportable supply of wheat in the world (production plus beginning stocks minus domestic consumption). USDA’s forecast for U.S. exportable supply of wheat is 49.7 MMT, accounting for 22 percent of world wheat exporter stocks. If realized, that is 8.2 MMT more than Russia and 13.9 MMT more than the European Union (EU).

This large exportable supply of high-quality milling wheat highlights the importance of trade to everyone’s bottom line. USDA projects world wheat trade to increase 2 percent from 2017/18 to a record high 187 MMT (6.88 billion bushels), and the United States is expected to have 14 percent market share by volume.

USDA predicts that total 2018/19 imports by most top U.S. wheat customers will remain stable year-over-year or increase slightly. Mexico, the top U.S. wheat importer the past two marketing years, is expected to increase total wheat imports by 8 percent year-over-year to 5.5 MMT. If realized that would be 14 percent above the 5-year average.

USDA expects Japan, the top U.S. customer over a 5-year period, will import an estimated total of 5.8 MMT, down 3 percent from 2017/18. Total wheat imports by both the Philippines and China will remain stable year-over-year at 5.8 MMT and 4.00 MMT, respectively. Nigerian imports are expected to grow year-over-year to 5.5 MMT, 17 percent from the 5-year average. Korean total wheat imports will increase 5 percent year-over-year to 4.6 MMT. USDA also expects Indonesia to import a record 12.5 MMT of wheat in 2018/19, up 4 percent from the year prior and 33 percent greater than the 5-year average.

The growth in total wheat imports in these countries is driven by increasing demand for high-quality wheat products. In the top 20 U.S. wheat markets, human wheat consumption is expected to increase about 3.6 MMT year-over-year with the largest increases noted in China and Indonesia.

Additionally, in those markets where the United States has a majority market share (greater than 50 percent), but that fall outside the top 20, such as Honduras, Costa Rica and Jamaica, human consumption is expected to grow an average 2 percent in 2018/19.

With wheat consumption driven by “sticky” food demand, the long-term outlook for global wheat demand is strong. The short-term outlook for demand is also pointing to higher prices for wheat with USDA expecting 2018/19 global wheat production to fall for the first time in 5 years due to forecast production declines in half of the major exporting countries. All of which is good news for U.S. farmers who are ready to meet the global demand for high-quality milling wheat.

To track U.S. wheat harvest, subscribe to the USW Weekly Harvest Report.

To track U.S. wheat export prices and stay updated on global wheat forecasts, subscribe to the USW Weekly Price Report.

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USW Harvest Reports Now Posting Every Friday

Generally cool spring conditions delayed the start of the 2018/19 U.S. winter wheat harvest, but the combines are now in the fields and U.S. Wheat Associates (USW) published a preliminary Harvest Report on May 25. USW Harvest Reports are published every Friday afternoon, Eastern Daylight Time, throughout the season with updates and comments on harvest progress, crop conditions and current crop quality for hard red winter (HRW), soft red winter (SRW), hard red spring (HRS), soft white (SW) and durum wheat.

The weekly Harvest Report is a key component of USW’s international technical and marketing programs. It is a resource that helps customers understand how the crop situation may affect basis values and export prices.

USW’s 14 overseas offices share the report with their market contacts and use it as a key resource for answering inquiries and meeting with customers. USW also publishes the report in Spanish as  “Trigonoticias,” distributed to Latin American wheat buyers and millers and posted on www.uswheat.org.

Anyone may register to subscribe to an email version of the Harvest Report. For the first time this year, USW includes links in the email to additional wheat condition and grading information, including the U.S. Drought Monitor, USDA/NASS Crop Progress and National Wheat Statistics, the official FGIS wheat grade standards and USDA’s World Agricultural Supply and Demand Estimates report. Harvest Reports are also posted online at www.uswheat.org/harvest.

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Drought and U.S. Rail Rates Prop Up U.S. Export Prices

By Stephanie Bryant-Erdmann, USW Market Analyst

Since the beginning of the calendar year, export cash prices for hard red winter (HRW) wheat prices have rallied an average 73 cents at the Gulf across all protein levels. However, export cash prices are made up of two components — wheat futures and export basis. Most of the export price rally matches the futures market, which climbed from $4.37 per bushel in January to $5.64 per bushel on May 25. However, U.S. Wheat Associates (USW) and the farmers it represents also face historically high rail rates that support the export basis.

The futures rally is based on two fundamental factors — drought in the U.S. HRW-growing area, which is shrinking the U.S. HRW supply, and concern about poor crop conditions around the world, which the market believes is increasing potential demand for U.S. HRW.

On May 10, USDA forecast global world wheat consumption to outpace global wheat production in 2018/19 for the first time since 2012/13 due to reduced production in Russia, Ukraine and Kazakhstan. The growing demand for wheat around the world and the expectation of smaller Black Sea supplies are pushing up U.S. export prices.

As of May 31, the U.S. Drought Monitor reported that the Oklahoma and Texas panhandles and 75 percent of Kansas are still in a moderate to exceptional drought. The corresponding wheat condition ratings reflect the effects: USDA rated 48 percent, 63 percent, and 54 percent of HRW in poor or very poor condition, respectively, in the region.

The market also expects the drought to help increase new crop HRW protein levels (although the data to support that expectation is not yet available). This has caused protein premiums and discounts to erode. In the Gulf, the protein premium for 12.0 percent protein (12 percent moisture basis) HRW over 11.5 percent protein (12 percent moisture basis) fell from an average $23 per MT ($0.64 per bushel) in January to $8 per MT ($0.21 cents per bushel) year to date in May (See “HRW Export Basis and Rail Rates”). Similarly, the average protein premium for 11.5 percent protein over 11.0 percent protein (12 percent moisture basis) fell an average ($0.35 per bushel) during the same time frame.

The declining protein premiums for HRW partially offset the futures rally, and export cash prices for 12.0 percent protein and 11.5 percent protein (12 percent moisture basis) HRW in the Gulf remain below the respective 5-year averages.

However, while the weather fundamentals are dominating the news, there is also a third factor that is quietly playing a role in U.S. export prices — increased U.S. rail rates. According to USDA/Agricultural Marketing Service Grain Transportation Report data, year-to-date in 2018, the average cost of railcar transportation for wheat from Kansas to the Gulf is $45 per MT ($1.21 per bushel). That is the highest level since USDA began tracking rail rates in 2010. Rail rates for wheat will increase to a new record high this summer according to notices that went out to customers in March and April.

Rail rates are a key component of export basis, which also includes elevation, barge freight and labor costs. Yet the cost of transporting wheat is shared by the farmer and the overseas customer through country elevator basis levels and export basis levels. Consequently, higher rail rates act as both a ceiling for farm gate prices and simultaneously as a floor for export prices.

On the export basis side, this can most easily be seen in the export basis levels for ordinary or unspecified protein wheat. Year-to-date in 2018, ordinary protein HRW export basis has averaged $42 per MT ($1.15 per bushel), compared to $27 per MT ($0.74 per bushel) in 2017, when the average rail rate from Kansas to the Gulf (See “HRW Export Basis and Rail Rates”) was $43 per MT ($1.18 per bushel).

As customers ride out the market volatility that always occurs this time of year, they should keep in mind that U.S. export basis levels are supported by increased transportation costs, and the 2018/19 global stocks to use ratio without China is forecast at a tight 20 percent as noted in the USW May 17 Wheat Letter article “Chinese Wheat Stocks Mask Tight Stocks to Use Ratio.”

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Even with Lower HRW Outlook, U.S. Wheat Production Called Up for 2018/19

By Stephanie Bryant-Erdmann, USW Market Analyst

With the small, stressed hard red winter (HRW) wheat crop getting the lion’s share of attention, it was an initial surprise to read in USDA’s May World Agricultural Supply and Demand Estimates (WASDE) that U.S. wheat production is expected to increase to 49.6 million metric tons (MMT) in 2018/19. That would be up 5 percent year over year, if realized.

The forecast increase is a result of greater harvested area and slightly higher average yield in the other classes. USDA forecast 2018/19 all wheat average yield at 46.8 bushels per acre (3.15 metric tons [MT] per hectare), up from 46.3 bushels per acre (3.11 MT per hectare) last year. Harvested area is expected to increase 1.3 million acres (526,000 hectares) in 2018/19. Crop condition ratings also matter in this forecast, and as the following by-class reviews show, HRW is clearly the exception to the up-trend in production.

HRW production is expected to be the smallest since 2006/07 at 17.6 MMT. If realized, that would be down 14 percent year over year and 22 percent below the 5-year average. Low farm-gate prices and poor planting weather last fall reduced 2018/19 U.S. HRW planted area to 23.2 million acres (9.4 million hectares), the second lowest planted area on record. That poor start coupled with widespread drought throughout the U.S. Southern Plains set up the current situation where harvested HRW acres are expected to fall 5 percent from 2017/18 to 16.5 million acres (6.68 million hectares).

The large decrease in harvested acres is centralized in the U.S. Southern Plains where HRW crop condition ratings remain poor. In top HRW-producing states of Kansas, Oklahoma and Texas, 51 percent, 65 percent, and 59 percent of HRW is rated poor or very poor, respectively. As a consequence of the drought and resulting poor crop conditions, USDA expects harvested area in Oklahoma to fall 31 percent year over year to 2.0 million acres (810,000 hectares). On May 10, USDA rated 25 percent of HRW in the states surveyed in good to excellent condition, while 45 percent is rated poor or very poor. Read more about the all too evident challenge of wheat farming on the High Plains.

Soft red winter (SRW) production is expected to increase to 8.57 MMT in 2018/19. If realized, that would be up 8 percent year over year, but still 22 percent below the 5-year average. 2018/19 U.S. SRW harvested area is expected to increase 8 percent from the year prior to 4.0 million acres (1.62 million hectares). USDA also expects record high yields in Indiana, Kentucky, Maryland and Michigan due to favorable growing conditions this spring.

On May 14, USDA noted week over week crop condition rating improvements in nearly all SRW-growing states, with 67 percent of the SRW acres surveyed rated good to excellent. Week over week improvements were noted in Illinois and Arkansas where 63 percent of SRW was rated good to excellent, up 10 percentage points and 5 percentage points, respectively, from the week prior.

White wheat.* 2018/19 white winter wheat production is forecast at 6.24 MMT, including 5.66 MMT of soft white (SW) winter wheat and 577,000 MT of hard white (HW) winter wheat. If realized, SW winter wheat production would be up 2 percent year over year, due to increased planted area, while HW winter wheat production would be down 11 percent from 2017/18 due to forecast reduction in average yield. SW winter wheat production is centralized in the Pacific Northwest (PNW) states of Idaho, Oregon and Washington. As of May 14, 71 percent of Idaho SW, 80 percent of Oregon SW and 85 percent of Washington SW was rated in good to excellent condition.

Desert Durum®. USDA expects Desert Durum® production — centralized in Arizona and California and planted in the winter — to total 332,000 MT, up 6 percent from 2017/18 due to significantly better yields in California. In Arizona, the Desert Durum® crop was 90 percent headed by April 29, significantly ahead of the year prior’s pace.

Spring wheat and Northern durum. Snow covered, frozen fields delayed spring wheat and Northern durum planting this year, but U.S. farmers are beginning to catch up. As of May 14, spring wheat and durum planting is 58 percent complete, up from just 30 percent complete the week prior, but still behind the 5-year average pace of 67 percent.

With spring planting still underway, USDA did not provide a by-class breakdown of production for hard red spring (HRS) and durum on May 10. However, USDA did note that combined spring wheat and Northern durum production is projected to increase 34 percent year over year due to “both increased area and yield.” With total U.S. wheat production projected at 49.6 MMT and U.S. winter wheat production projected at 32.4 MMT, that puts 2018/19 spring wheat — including soft white spring, HRS, and hard white spring — and durum production at 17.2 MMT.

Back on March 29, USDA projected U.S. HRS planted area at 12.1 million acres (4.9 million hectares). If farmers are able to realize their planting intentions despite the late start, that would be up 17 percent year over year. Northern durum planted area was forecast at 1.88 million acres (760,000 hectares), down 14 percent, if realized. Still, weather will play a role in farmers’ decisions, and a late spring in Montana and western North Dakota tends to favor increased wheat area. Conversely, it tends to favor increased corn and soybean acres in Minnesota.

To stay in touch with U.S. wheat harvest progress, subscribe to the U.S. Wheat Associates Weekly Harvest Reports, which will start later this month.

*In the May 10 report, USDA combined data for soft white winter wheat and hard white winter wheat. Both soft white (SW) and hard white (HW) can be grown in either the spring or fall. USDA will provide a wheat by-class outlook in July. Similarly, data for HRS, SW spring, HW spring and spring-planted durum were combined into a general “spring-planted wheat” category.

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