NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

August 27, 1998

The Market Advisor: Factors to Consider in the Wheat Market

George Flaskerud, Extension Crops Economist
NDSU Extension Service

A significant recovery in crop prices will likely take time. A lot of wheat has gone into storage. The same situation is also expected to occur with corn and soybeans. These stored crops will eventually come to market, making price recovery difficult.

In the mean time, buying December put options on spring wheat in storage may be worth considering. The size of the hard red spring wheat crop is still an unknown, and many in the trade feel the crop could be considerably larger than the 34.2-bushel-per-acre yield (other spring wheat) reported by USDA on Aug. 12. The spring wheat December futures price on Aug. 24 in Minneapolis was at a 61-cent premium to the December futures price in Chicago, which is at the high end of premiums during the last 10 years.

China is a major wildcard. USDA's August Supply and Demand Report indicated that China's wheat crop would be 8 million metric tons (mmt) smaller than the July projection, due to flooding. A logical conclusion is that they would make up some of that loss by importing, but USDA says no. USDA kept China's projected imports at the same low 2 mmt projected in the July report, which was about the same level of imports as a year ago. China is expected to draw down on plentiful carryover stocks instead of importing. However, nobody knows for sure the extent of their field and storage losses, and the amount they have in storage. As for the rest of Southeast Asia, most analysts are saying that an economic recovery there is unlikely for at least two years.

Many analysts are challenging USDA's projection of wheat exports. The point of contention is the donation program announced by USDA in mid-July. Will the donations result in a significant net increase in exports or simply replace expected commercial exports? USDA chose to increase projected exports by 75 million bushels in its August Supply and Demand Report. The impact of these concerns (the donation program and China's losses) on exports may not be known until next spring.

At the same time, the amount of wheat that will be fed remains uncertain. Some in the trade feel that the wheat price will distance itself from the corn price too much for USDA's projection of 400 million bushels to be met. The wheat-corn spread in nearby Chicago futures was 30 to 50 cents during June-August when most wheat is fed, a difference that usually leads to substantial wheat feeding. USDA's Stocks Report released on Wednesday, Sept. 30, will determine who is right.

A substantial amount of the winter wheat could be grazed if wheat prices stay low into the spring. If that should happen, any recovery in the wheat price would be delayed until late spring.

Most of the spring wheat crop is reportedly being stored. Prices will have to improve before the grain will move out of storage. But, it is very likely that every dime increase in price will be met with sales, making the price recovery slow at best.

The number of acres that will be planted to winter wheat this fall is very questionable. Scab may be as much of a concern for soft red winter wheat producers as it is for many spring wheat producers. At loan values, oilseeds and other crops may be more profitable.

Winter wheat acres could drop sharply, especially in the soft red producing states. Winter wheat acres could also drop sharply in the European Union where a set-aside of 10 percent is in force for 1999, versus 5 percent for this year.

Durum prices will not likely recover for some time. The International Grain Council is projecting carryover stocks of about 147 million bushels for the United States, Canada and EU combined, which is almost double that of a year ago and close to the carryover for 1993-94. The IGC projection, made July 30, could be underestimated, considering the favorable growing conditions in the United States and Canada since that time.

Some recovery in the durum price is possible late next spring. At current prices, farmers may shift some acres out of durum this fall in California and Arizona and next spring in the Northern Plains. Also, North African yields are always a major uncertainty, and those yields will not be known until their harvest next spring.

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Source: George Flaskerud (701) 231-7377

Editor: Dean Hulse (701) 231-6136