I have an inclination to use a hunting analogy about how we sight in on a target as it comes closer to being in range, but everyone who knows me also knows that I am as blind as a bat, so if you ever see me handling a firearm, just pray that it is not loaded . . . Skip the analogy, and let’s talk about the price of wheat.
In the past few weeks, we have started to see the first international sales of 2014 crop wheat. Because of the liquidity of the futures markets in North America, we are used to seeing cash prices daily for wheat a year or two in advance of the actual transaction. It is an enormous advantage to growers in this part of the world to have access to such a fluid market, but as the world market’s cash values for the crop begin to develop, the combination of futures and basis need to converge in order to come into line with the transactional price. Effectively, as the futures become deliverable, the price has to come into line with a value where someone would in fact take delivery.
In years like 2008, when the Australian drought created a wheat shortage which drew our prices higher at harvest, it is easy to be an optimist about value as we start to look at international business. So far in 2014 that has not been the case. Over the past week there have been three sales of soft wheat which would match up with the sort of quality one might reasonably expect to see come out of the Great Lakes basin. In U.S. dollars they traded at $266.75/MT, $272.23/MT and $269.49/MT delivered to Tunisia and the Philippines. By the time one backs out an estimated freight cost, and the other expenses associated with shipping wheat around the world, these sales would only support a cash bid of about $220/tonne to an Ontario producer who was delivering into a lakes terminal. These were not small sales either. The total volume of these three transactions totaled 155,000 metric tonnes, which is a good indication that there is volume available at these price levels.
The point of sharing this information is not to cause panic. We need to temper this information with two facts. First is that simply because the world’s soft wheat market traded at these values between May 23 and May 27, does not mean that the prices will be the same between July 23 and July 27 when Ontario’s wheat is looking for a spot in the world’s market. There is no doubt that a lot of things might happen between now and then. The second consideration is that these markets, (particularly the Philippines), are not the most likely destinations for our wheat, so we could be backing off freight to places where Great Lakes basin soft wheat would not actually go. Our market will still need to be prepared to compete with the origins which would sell this week’s pricing, but hopefully to better-selected destinations.
If North American wheat producers are reluctant to sell at the world price, and they tuck a large portion of it away, then we can expect to see the futures market spreads (or “carry”) widen out. With today’s spread between July and December wheat futures at $0.42, the market is saying that it will pay $0.10/bu per month to store wheat. Big storage carries typically don’t mean that the grain is worth more later as much as they mean that prompt movement comes at a discount. The wide spreads in futures suggest that the price is trying to slow the speed at which wheat comes into the market, which is consistent with the relatively low prices being traded in international exports today.
A person can take a crop tour across a big portion of Ontario’s winter wheat country and come away with the understanding that our winter wheat crop will not be exceptional. While this is no doubt true, the world is well enough supplied that our problems are not sufficient to rally price. If you know that you will need to market wheat during the harvest period, try to keep a very close eye on the export sales values, because they will form the price for soft wheat which needs to move out this summer. If your 2014 wheat marketing plan includes utilizing storage, try to focus your sales into the forward time slots and lock in the storage returns which the futures spread provide. Avoid making the sales when the wheat needs to move, as there is little reason to believe that supply will suddenly become scarce.