U.S. wheat exports are projected to be the second-highest since 1996, and strong future demand is expected, according to a Texas AgriLife Extension Service economist.
"Other than exports, the demand categories for U.S. wheat have been relatively stable the last few years," said Dr. Mark Welch, Extension economist at College Station."Production is up with better-than-expected yields, but if exports stay strong, they will reduce ending stocks. The level of ending stocks had grown to numbers not seen since the mid-1980s."
The change in wheat supply and demand fundamentals can be seen in the latest World Agricultural Supply and Demand Estimates, with special emphasis on the impact of the drought in Russia, Welch said.
"It’s particularly hard-hitting in the wheat markets because over the last several years the nations of the former Soviet Union have intensified wheat production and captured more world market share," he said. "The nations of the former Soviet bloc are now the number one exporters of wheat in the world, and with the drought, that’s creating volatility in the market."
Wheat prices had increased as the impact of the drought became more evident, but wheat prices moved even higher when Russia announced the suspension of wheat exports and the canceling of forward contracts.
"That resulted in another spike in prices and leads one to question whether Ukraine and others will follow suit," Welch said. "That’s yet to be seen. On the U.S. side, we have a large crop with ample supplies to capture this new export opportunity."
The world’s wheat supplies are more than adequate to meet demands at this time, Welch said, and looking ahead to the fall planting season, there are several factors to consider.
"One is the drought in Russia and will it continue," Welch said. "They will need rainfall to replenish those soils and establish the new crop. Winters are extremely harsh. That crop needs to be in good condition to survive winter weather. In the U.S., a La Nina winter is on the horizon, which is usually associated with lower-than-normal wheat production in the Southern High Plains."
Typically in a La Nina winter, temperatures are above normal and precipitation levels below normal through much of the southern winter wheat growing areas, Welch said.
"We are transitioning from an El Nino weather pattern where you have above (average) precipitation and one of the best wheat crops ever," Welch said. "But just because we face a La Nina doesn’t mean it will be a crop failure. On average, Texas production of wheat in an El Nino winter is 5 percent above the trend line average and in a La Nina winter, about 5 percent below because of the likelihood of poor growing conditions."
The current wheat situation has created some profitable price levels in the futures market, Welch said, but the question is does a producer have the tools to take advantage of these opportunities.
"The basis (the difference between the local cash price and the futures price) for wheat during this past harvest was very poor," he said. "We saw cash wheat prices fall to the lowest levels in years. That basis remains relatively low and to lock in cash wheat prices now generally locks in that poor basis. I want to lock in this price on some of next year’s crop, but not necessarily this basis. Futures and options let you do that or ‘hedge to arrive’ contracts with your elevator."
Welch predicts the cost basis to improve for wheat.
"The factors that contributed to the recent weakening of the basis—large crop, tight storage, shut down in the export market—appear to be changing," he said. "We may not see the storage difficulties of this year if production is back to normal levels or less and exports are on the rise with the drought in eastern Asia and weakness in the dollar. Wheat customers are coming back to the U.S. because of the dependability and adequacy of our supply. I think there are some good opportunities to lock in some prices for next year; however, I would be hesitant to lock in this basis right now unless that’s the only alternative you have."