In about 60 days, Ontario farmers will begin to harvest one of the biggest wheat crops ever planted. With an anticipated winter wheat crop of about 1 million acres, 85% of which is expected to be soft red winter, we should expect to see about 2 million tonnes of wheat harvested in Ontario in July and August. So how do we expect this wheat to disappear?
While Ontario has a reasonable sized flour milling industry, the province’s mills will only grind about 600,000 tonnes of locally grown wheat annually, which only represents about 30% of the total production expected from the 2013 crop. This means that Ontario wheat producers who are interested in developing market expectations for their crop need to look at outside world markets in order to get an appreciation for where the wheat market sits on pricing.
The snapshot below is a clip from US Wheat Associates newsletter showing the values on international wheat trades last week. It’s an enlightening look at the market if you are not normally aware of the export market situation.
If you are not familiar with the jargon of wheat grades, “DNS/14.5” is dark northern spring, with a 14.5% minimum protein. It would be best described as a prairie style wheat. “HRW/12.5” is hard red winter with a minimum protein level of 12.5%. Ontario certainly produces hard red winter, but over the past few years one would be pretty reluctant to guarantee a 12.5% minimum protein on the biggest portion of Ontario’s production. “WW” is white winter, and certainly every producer in this province is familiar with it. The prices on this chart seem reasonable until you consider that they are in U.S. dollars per metric tonne and delivered to Taiwan. You don’t even have to finish working out the freight back-off before it’s obvious that our wheat is not going to be moving there.
To be certain, the values listed above are all in the Asian market, and simply due to the shape of the planet, our grain doesn’t get there easily. These are not the destinations that Ontario wheat sellers would be looking to make sales, but they are good indicators of world market values. The prices shown above are not just “stink bids,” but values which somebody actually sold.
Historically, when eastern Canada has produced large wheat crops we have moved substantial portions of that crop out the St. Lawrence River and into the export market. In the big wheat harvest of 2008, Ontario shipped 1 million tonnes out the river on vessels before the ice closed the seaway to winter navigation. It is unreasonable to expect that we will find growers willing to sell wheat at the values supported by the current export market, so it is unlikely that this year’s wheat crop will flow to market quickly.
Two things are predictable with regards to the domestic wheat market for the summer and fall of 2013. The first is that the carries will open up to the point where it pays to store wheat. “Pays to store” doesn’t mean that wheat values will be substantially higher if you can hoard it until later; what it really means is that prices will be discounted if you are in a position where you have to move it now. An over supplied market will not be friendly to those who need to sell. If you can store wheat, look seriously at deferred contracting options as a way of avoiding being a price taker in a wheat market struggling to create movement.
The second predictable outcome is that the domestic corn market is higher than the export wheat market, so if we need to create demand for eastern wheat, its most obvious source of demand is replacing corn in livestock feed. Feed has actually developed into one of the bigger markets for Ontario wheat over the past few years as our access to export markets has declined, corn values have pushed higher and feed formulators have become more comfortable with utilizing soft wheat in their rations. The only real cause for concern in this outcome is that a large wheat crop limits the potential for corn prices to rally late in the summer season. Effectively, the price of wheat becomes the high water mark in corn values.
Before anybody goes looking for a rope and a branch to swing it over, let’s remember that there is weather every day between now and when the wheat is safely in the bin. Any event which could be harmful to world coarse grain stocks will be useful to our wheat values, and any event that is harmful to U.S. wheat quality will create an even more direct response in Ontario wheat prices. A wise trader that I used to know had a saying, “go ugly early,” and while I’m not totally convinced that we need to go ugly, I do think that it’s time to face the fact that our outlook might not be all that pretty.