With about six weeks remaining before Ontario farmers fire up the combines and head into harvesting the 2013 winter wheat crop, there is a great deal of attention being paid to the bids for wheat and the sources of demand which support them. At this point there is not much joy on the faces of Ontario’s wheat producers as they size up this market.
There are a couple of obvious reasons why wheat buyers are conspicuously absent from the marketplace at the moment. The first of these is that millers have a substantial stake in the quality of the crop which they purchase, and due to the capacity of the weather to impact quality specifications like vomitoxin, falling number, protein, and gluten strength, they will be cautious until they have a good understanding of the quality of product which they are bidding on, and know how scarce wheat which meets their quality requirements really is. This mindset is true of both domestic flour millers and export millers, so it may take time for the market to size up the quality of the crop before they get too anxious to bid on it.
The more significant consideration is that the upcoming crop is widely expected to be big. While there has been issues with the growing conditions in the western United States, (Kansas and Oklahoma), there was a large acreage seeded to soft red winter in the Great Lakes Basin, and it has made it through to heading in good condition. Soil moisture has been adequate to bring it through filling, so yield expectations are very good in most areas. If the anticipated 2013 soft red wheat crop was expected to be small, buyers would be more active in ensuring that they capture their piece of the supply, but when the crop is generally expected to be four times the size of the domestic milling demand, end users are more inclined to hold back with the expectation that they will get to chose the qualities and prices that they are looking for.
Historically, wheat is a premium price product to corn since wheat is primarily used in flour production and corn, although sometimes used in human consumption, is largely utilized as a feed grain. In terms of nutritional components, soft red wheat and corn are remarkably similar. Both are roughly 9% protein and 63% fermentable starch, resulting in wheat’s capacity to substitute for corn in situations where wheat is abundant and corn is scarce. We saw this play out in the market last summer and fall as new crop wheat displaced the historically high priced corn as soon as it was available after harvest, and the spot values for old crop soft red wheat and corn going into the feed trade have largely remained in lock step through the balance of the crop year.
Following last summer’s drought across a large portion of the U.S. corn belt, (and regions of Ontario), corn is well priced at today’s values, so much so that Ontario is exporting corn in the summer of 2013 at a pace which is unparalleled in our history. It is expected that Ontario will export about one million tonnes of corn produced in the 2012 crop year. So if wheat is expected to compete with corn, and corn is already priced to move, then why is the wheat market lagging so far behind?
The answer to that question lies in how fast this year’s wheat crop is going to come to the market. Most of the current bids for new crop wheat are built around the premise that producers tend to market a large portion of their wheat crop right at harvest. If Ontario produces two million tonnes of wheat, and 50% of it is marketed between harvest and Labour Day, it will be coming to the market at the pace of 185,000 tonnes per week. (A pace which clearly overwhelms demand and drives values lower). If we could market Ontario’s two million tonnes of wheat evenly throughout the entire crop year, it would only flow at 46,000 tonnes per week, and the system could absorb it with no harvest pressure on price. The market is a lot like a highway in rush hour. If you could simply spread all of the traffic out evenly, everything would move along well; the problems happen when too much traffic tries to clear the system all at the same time, and that seems to be a big fear of the wheat market’s looking forward to this harvest.
In terms of grower strategies, there are two decisions which need to be made prior to the start of harvest. The first is: Am I comfortable with selling wheat in the gut slaught, or do I have a strategy to avoid a potentially messy period? The second is; Am I comfortable holding old crop corn into a big wheat harvest? Or will a big supply of wheat put pressure on the other feed grains?