During the last six weeks, managed funds’ wheat futures contract positions went from about 650 million bushels net short (sold) to about 645 million bushels net long (bought). Oklahoma and Texas Panhandle wheat prices went from near $3.75 (June 6) to $4.80 (July 11) to $4.30 (July 17). Fund management appears to have changed from a pessimistic scenario to an optimistic outlook.
A major driving force may have been the change in U.S. spring wheat production expectations. The USDA projects U.S. hard spring wheat production to be 385 million bushels, compared to 493 million bushels last year, and a five-year average of 523 million bushels.
The reduction in U.S. spring wheat production expectations was a pivotal factor for the USDA’s reduction in total U.S. wheat production from 1.824 billion bushels in the June WASDE report to 1.760 billion bushels in the July WASDE report.
Hard spring wheat, which normally averages 14 percent protein, is often blended with lower protein hard wheat. For quality bread flour, millers need the wheat protein to average near 12 percent.
Another driving force is U.S. hard red winter (HRW) wheat production is projected to be 758 million bushels compared to 1.08 billion bushels produced last year and a five-year average of 880 million bushels. The 2017 HRW wheat crop is below average in number of bushels produced, but it is reported to be excellent milling quality. On the negative side, the protein level is too low.
LOW PROTEIN LEVEL
This shortage of protein in the wheat is shown by a $2.75 spread between the KC (hard red) wheat futures contract and the MW (hard spring) wheat futures contract. The Kansas City wheat basis for 11 percent protein wheat was 35 cents. The basis for 12 percent protein wheat was 95 cents (Milling and Baking News, July 18, 2017 edition).
Also contributing to the funds’ change in wheat outlook were lower production expectations in most major foreign hard wheat producing countries: Australia -33 percent; Canada -24 percent; Kazakhstan -13 percent; Russia -1 percent; and the Ukraine -10 percent.
For wheat prices to continue the upward trend, foreign wheat production expectations must decline. While world hard wheat production is projected to be 13 percent lower than last year, foreign total wheat production is projected to be essentially the same as last year. Higher production in the European Union and other wheat producing countries more than offsets the reduction in production in the hard wheat countries.
Negative price factors in the wheat market include a world wheat stocks-to-use ratio of 35.4 percent. The record stocks-to-use ratio is 36.9 percent (1985).
SHORT HIGH PROTEIN SUPPLY
While world wheat stocks are expected to be a record high 9.6 billion bushels, quality milling wheat may be in short supply. We know that relatively high protein wheat will be in short supply. In this case, quality may trump quantity, and wheat prices could go higher.
So, what does the current wheat situation imply about planting wheat for the 2018 harvest?
First, the odds are relatively high that the protein premium will remain into July 2018.
Second, wheat stocks may be at near record levels, but milling quality bread wheat may be in short supply. Thus, the market will need, and will pay for, good milling quality wheat (test weight, kernel size, and falling number) in 2018.
Third, wheat needs to be planted on productive land with management practices applied that will increase the odds of producing a quality milling product. Quality wheat should result in $5 wheat prices in June 2018.
The managed funds bought 1.3 billion bushels of wheat. When developing a marketing strategy, remember that the funds currently have about 645 million bushels of wheat for sale.