A soggy fall in Ontario in 2014 following a summer which did not provide enough heat to accelerate crop maturity has created an unusual bean harvest which is dragging nearly two weeks behind the typical schedule, and while this weather is responsible for some significant market events this fall, the impact which the wet weather has had on winter wheat planting will drag out well into the 2015 -2016 marketing season.
Solid data is extremely difficult to obtain in the rather liquid business of harvesting soybeans and planting wheat, but in conversations with growers across eastern Canada it would appear that perhaps as little as 50 per cent of the intended winter wheat acreage was planted as of October 21. On that same date, Ohio reported to have 55 per cent of its’ winter wheat sown versus a typical pace of 75 per cent for the third week of October. For Michigan, the October 21 planting progress was at 60 per cent against a five-year average of 78 per cent. It is reasonable to presume that with winter wheat planting at 20 per cent to 25 per cent behind the expected planting pace this fall, and we have no cause to believe that the end of the planting window will come any later, that soft red winter wheat acreage will likely come in 20 per cent to 25 per cent smaller for the coming crop year.
While Ontario’s 2015 winter wheat crop could easy drop from 700,000 acres to a more modest 550,000 acres, the bottom line reality is that eastern Canada will not run out of wheat. The domestic flour mills’ demand for locally grown winter wheat is typically 450,000 to 500,000 metric tonnes. This means that we only need to harvest 250,000 acres in order to satisfy this province’s demand for soft winter wheat.
In terms of how the market behaves due to tighter domestic supplies, there are a few outcomes which we can be certain of. The first of these outcomes is that we will not see the corn price become the floor value for wheat. In 2012, 2013, and 2014, following the end of wheat harvest and prior to the start of the new crop corn supplies, we have seen the cash value of soft red wheat come into line with the price of corn. This occurs because the wheat supply is surplus to the wheat demand, and the best alternative value for soft wheat is as a starch source in livestock feed. If wheat needs to move faster than the flour industry wants to take it in, the values shift into step with corn and the grain is utilized for feed. Do not expect to see this happen in a year of tighter wheat supplies. Wheat values will remain at a premium to feed grains because stocks will be too tight to lose supply to alternate uses.
A second key change to the soft wheat market is that we should expect to see the large carries in the CBOT wheat futures collapse. Since 2008 – 2009 we have had excessive stocks of soft wheat in North America and it results in wide “carries” in the futures markets. When we see much higher prices for futures in the further away contracts, (i.e., Dec. wheat at $5.50, March wheat at $5.62 and May wheat at $5.75), what it really tells us is that there is a discount on the value if you want to price in wheat in the near term. Big futures carries are a sign of excess supply, so as the decline in acres impact the 2015 crop supply, watch those spreads tighten in. Narrow futures spreads make it hard to lock in a return from storing wheat, and therefore reduce some people’s inclination to hold stocks in storage. Over the past three years, nearly a quarter of the soft wheat in the Great Lakes basin did not get used in the crop year in which it was grown. This change in the futures behavior helps to keep supplies liquid in a time of tight stocks, and it does this by forcing stored inventory out into the market as the carries for carrying it erode. It also means that growers may want to reconsider how they merchandize their on-farm storage space for the coming crop year.
Ultimately the purpose of price is to ration the available supply. For the previous few crop years, the stocks to use ratio of soft red wheat in North America has been over 25 per cent, so the price has not needed to work very hard in order to draw supply to market. The coming reduction in supply for the 2015 moves us nicely towards cleaning up the surplus stocks. With the inventory of 2014 crop wheat in the bins still more than adequate to meet demand, don’t expect to see radical bounces in old crop wheat prices, but as we move into spring, and weather factors like winter-kill threaten to reduce the size of an already small wheat crop, then there is realist potential to take 2015 crop values higher.